Why Cannabis Investors Should Focus on Individual State Regulations

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Friends,

Investing in cannabis has been very challenging this year. The Global Cannabis Stock Index rebounded slightly since making a new all-time closing low on 6/30, up 5.2%, but it is still down YTD by 52.6%. If cannabis stocks continue to rebound, investors will become more interested in the sector. One thing we think investors need to work on is their understanding that cannabis is very state-specific.

No state is exactly the same, and some are radically different. Some states, like Florida, force vertical integration, and most allow companies to focus on being a producer or a retailer. Some states limit the types of cannabis that is available. Some states cap how many stores one company can own or how much cannabis it can grow. The end result is that the opportunities in each state can be very different.

Given how different the rules are in each state, it is imperative that investors understand the dynamics of the environment in which the companies they might invest operate. Below, we share recent news in four states to illustrate this.

California

The largest state has a rich history in legal cannabis, but a short one as regulated by the state. The state moved to introduce adult-use and to regulate medical cannabis at the beginning of 2018. 4 1/2 years later, the state is very productive, doing more than $442 million in state-legal sales in May, according to BDSA. While this is a big number, it’s down more than 7% from a year ago.

The state just passed a new law that modifies its cultivation taxation. Perhaps the move missed on the full potential of making changes, but hopefully it helps address a serious challenge. The state has a fixed amount of taxation based on volume, but prices have been falling, making the tax a very high percentage for some. The state did nothing about the retail tax.

Illinois

When we shared our bull thesis in June, we cited Illinois as one of the factors. The state was very slow to expand the number of dispensaries, due to legal challenges when it declared new ones. The state is more than doubling the number now, which will help those who cultivate or process by giving them more potential customers. Since the state limits companies to no more than 10 stores, the current operators will not be able to get any bigger this way.

When the state was medical-only, several issues concerned us (especially mandatory fingerprinting), but it has been a great adult-use market. We are very excited to see this expansion.

Minnesota

The state of Minnesota has been a tough state. It has just two medical-only operators, but both have been or are in the process of being acquired. Goodness Growth is selling itself to Verano Holdings, and Green Thumb Industries picked up LeafLine Industries at the end of the year. Why are they entering the market? Both are getting ready for legalization in the future. For now, the medical program has improved too, with both companies now allowed 8 dispensaries instead of 4.

Recently, the news from the state was about a Republican oversight in the legislative process that ironically resulted in the state approving THC for edibles as of July 1st effectively. 5mg of THC can be added to hemp products that are sold in 50mg packages. Starting in August, the rule says 10mg of THC in packages of 100mg. This could be a slight negative, for now, for the two licensed cannabis providers. Adult-use, if it happens, will be a big victory.

New York

New York hasn’t yet implemented its adult-use program, but many companies set up unlicensed dispensaries and were active in the market. This created concern by investors about how the market would develop for the licensed companies, which will include the ten current organizations serving the medical market. The state has taken action with two lists totaling 66 cease and desist letters that the New York Office of Cannabis Management sent. They can be viewed here and here.

We think this is a solid move! It’s better than the way California treated their non-licensed dispensaries, which remain a problem.

Conclusion

We have discussed 4 states in order to drive home the idea that investors need to understand the rules for each state to assess the risks and opportunities in their investments. Oklahoma has easy access, but it is burdened by too many medical cannabis operators, which makes it hard to do well in the state. Among the companies we discussed, we are very optimistic about the future of New York and other eastern states going from medical-only to adult-use. We are also excited about the additional dispensaries coming to Illinois.

We interview a lot of companies operating in many states, and we try to get the interviewee to discuss operations on a state-by-state level. We also publish state-specific pieces about the individual markets. Investors will be well-served to start thinking more about the markets in which a company operates.


This week’s newsletter is sponsored by Mobius

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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

Exclusive

We review BDSA’s monthly cannabis sales data for 11 states in this exclusive article. Total monthly sales across these markets totaled $1.66 billion.

June Illinois adult-use cannabis sales decreased 2.3% sequentially to $126.8 million. Medical-use sales will be reported separately.

Investments

NewLake Capital Partners has invested $50 million in three properties, marking the full commitment of money raised in its $100 million initial public offering last year. New Lake purchased two unidentified properties from a publicly traded U.S. multi-state cannabis operator and amended its lease with another.


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Sincerely,
Alan & Joel
info@newcannabisventures.com

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Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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