N.J. to Vote on Cannabis Legalization, Congress Mulls SAFE Act

Two key votes this week will help set the tone and direction for cannabis acceptance in the U.S., including a push by New Jersey to become the 11th state to legalize recreational pot.

Garden State lawmakers are expected to vote Monday on legalization and it’s looking like it could be a close call. This may be the state’s last chance to pass the bill before legislators have to turn their attention to budget negotiations, meaning legalization could get pushed back to 2020 in both New Jersey and New York.

Then, on Tuesday, the U.S. House Financial Services Committee will vote on the SAFE Act, which would permit commercial banks to offer services to cannabis companies that are in compliance with state law. For now, banks are largely avoiding the space because of the legal risk, forcing many dispensaries to make payroll and tax payments in cash.

The vote, scheduled by Committee Chairwoman Maxine Waters, comes just six weeks after the first hearing on the proposed legislation.

“That it is happening so quickly suggests that Rep. Waters is confident that it can pass and she is comfortable that the bill works as intended,” Cowen analyst Jaret Seiberg wrote in a note.

Seiberg said the bill will almost certainly get the approval of the full House later this spring, but passage in the Senate will be a much harder proposition.

“To us, the best chance for the SAFE Act would be to get attached to the spending bill that Congress must pass by Sept. 30 or to another must-pass bill,” he said. If that doesn’t happen, adoption will likely be pushed back to 2020.

Regardless of what happens with New Jersey and the SAFE Act, cannabis compounds are making their way to U.S. drugstores. Curaleaf Holdings Inc. is selling creams, sprays and lotions infused with cannabidiol at more than 800 CVS Health Corp. stores, making it the first cannabis company to secure shelf space with a big-box retailer. This gives the U.S. pot firm an unprecedented ability to build brand awareness with mainstream consumers, potentially opening a whole new source of revenue, analysts said.

It’s interesting that a company with U.S. operations was the first to make this leap into the big-box mainstream. Just two days before Curaleaf’s announcement, Tilray Inc. Chief Executive Officer Brendan Kennedy touted the acquisition of hemp-food company Manitoba Harvest, saying its existing relationships with major U.S. retailers would give Tilray a head start in the CBD space.

“We have lots of demand from U.S. retailers, whether it’s Whole Foods, Amazon, Albertsons, Costco, et cetera, and they’re looking for CBD products to put on their shelves,” Kennedy said in an interview last week. “They want to go with brands they know and supply chains they trust, which is why we did the Manitoba Harvest acquisition.”

Clearly, big investors are feeling increasingly comfortable with the U.S. cannabis landscape. Companies with U.S. operations have always traded at a discount to their Canadian peers because of the legal uncertainty south of the border, but that gap is starting to close in some instances as investors take a closer look at the growth opportunities.

BlackRock Inc. had an $11 million stake in Curaleaf at the end of 2018, a lucrative investment given the stock has more than doubled since the beginning of this year. That makes the $6 trillion money manager an early mover among institutional investors and will no doubt be followed by a wave of others taking their chances on the federally illegal drug.

MedMen Enterprises Inc., meanwhile, has secured what it believes is the largest investment made by a single investor in a publicly traded pot firm with U.S. operations. The Los Angeles-based company said Friday it has signed a binding term sheet for a $250 million convertible debt facility from Gotham Green Partners LLC, a New York-based private equity firm specializing in cannabis investments.

This growing investor interest has prompted Horizons ETFs Management Canada Inc., the creator of the first marijuana exchange-traded fund, to move ahead with plans for a U.S.-only pot ETF.

The popular Horizons Marijuana Life Sciences Index ETF, with over C$1 billion ($750 million) in assets, can’t hold any firms with U.S. operations because the Toronto Stock Exchange prohibits companies that aren’t compliant with federal law where they operate. CEO Steve Hawkins said investors are demanding exposure to the U.S. marijuana market, and Horizons is “actively pursuing” the creation of such a fund, which wouldn’t trade on the TSX.

All this excitement around U.S. companies hasn’t stopped the large Canadian licensed producers from vastly outperforming most of their peers on the S&P/TSX Composite Index. In fact, pot companies make up the six best-performing stocks on the benchmark year-to-date.

CannTrust Holdings Inc., which was just added to the benchmark on March 18, is the top-performing stock on the S&P/TSX this year with a gain of approximately 100 percent, followed by Hexo Corp., Cronos Group Inc., Aurora Cannabis Inc., Aphria Inc. and Canopy Growth Corp. We’ll see potential catalysts for a couple of these stocks this week, when Cronos reports earnings on Tuesday and CannTrust releases its results on Thursday.