Senate Goes Blue: The Cannabis Analyst Take

Two days ago, Georgia had its senate runoffs to effectively decide which party would have the majority within the Senate. On the night of the runoff, one seat was already called; Raphael Warnock, a Democrat, won the special election. Last night, the Associated Press called the second election for Jon Ossoff, a Democrat. As a result, the Senate now has an equal amount of Democrat and Republican Senators, with VP-elect Kamala Harris (a Democrat) to provide the deciding voting on matters, effectively giving the Democrats control of the Senate.

This has had some significant implications on U.S Cannabis, with the broad sector, both Canadian based and U.S based cannabis stocks posting gains yesterday of between 7-15%. They are continuing their run today with “the majors” being up between 2 and 13%.

Although analyst’s haven’t changed their fundamental analysis of these companies and therefore haven’t increased the price target on any of them, many have come out with a note explaining the significance of these runoffs and what it means for U.S Cannabis going forward.

First was a short note by Raymond James, whom notably only covers Canadian operators. Rahul Sarugaser, Raymond James’ analyst, expects to see sustained strength in the Canadian cannabis stocks. He specifically calls on Village Farms and Cronos as their top picks for this rally and says, “We’ve now passed this pivot point, and we believe Canadian cannabis stocks are in for a significant run.”

Next is Matt Bottomley, Canaccord’s cannabis analyst, who says this touches a wide array of problems. The first thing he talks about is the MORE act, where he writes, “we believe the prospect of it now moving to the Senate and eventually being brought into law is significantly improved due to the results of Wednesday’s Senate elections.”

Next is SAFE Banking. Just like the MORE Act, he is optimistic about it being read and being voted on. He says that if SAFE were passed, the cost of capital would decrease and, therefore, increase the operating efficiency of the whole sector.

Bottomley touches on the Unit Task Force Recommendations. Bottomley says that now with the Senate blue, what once was a significant roadblock, the Biden Administration, “may now have more flexibility with respect to how the above initiatives are potentially brought into practice.” He also touches on the momentum that State-level initiatives have had during 2020. He writes, “we anticipate many other markets (including New York, Pennsylvania and Connecticut) to potentially enact cannabis reforms for adult-use sales as early as later this year.”

Bottomley writes, “Sector valuations still reasonable”, this is after the large move upwards many of these cannabis companies have seen in their stock price over the last 5-6 months. He says that the currently 2021 EV/EBITDA multiple is roughly 13x, “which we believe leaves plenty of room for additional upside given strong fundamental performance and the sector’s expected high growth profile in the coming years.”

Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.