Experts who participated in a recent online panel agree there should be no doubt about the US being the priority for anyone looking to invest in cannabis.
In a conversation at the most recent Prohibition Partners LIVE event, Thomas Carroll, senior analyst with Stansberry Research, and Matt Karnes, founder of GreenWave Advisors, explained that the US cannabis marketplace should not be dismissed merely on legality concerns.
Even though cannabis is federally illegal in the US, states have moved ahead with legalization programs for the sale and consumption of cannabis for medical and even recreational methods.
Furthermore, Carroll told the audience, CBD-based Epidiolex is a federally approved drug sold and distributed today by GW Pharmaceuticals (NASDAQ:GWPH).
“If you wait to get involved until the president, either this one or the next one, puts pen to paper and signs some type of meaningful legislation, as an investor you’re way, way, way behind the boat,” he said during the conversation at the event.
Aside from that, interest from institutional investors is picking up — the analyst pointed to a recent US Securities and Exchange Commission filing that shows over 3 million Green Thumb Industries (CSE:GTII,OTCQX:GTBIF) shares were picked up by a single institutional investor.
Should cannabis investors focus on the US or Canada?
At one point, host Sam Volkering, who is editor and investment director at Southbank Investment Research, asked the panel participants about investing in the US cannabis market compared to investing in the Canadian industry. For both experts, the answer was clear.
“I’ve been telling people for the past six months, you have to be invested in US cannabis stocks starting right now, and that’s really where we should be focused as investors today,” Carroll said.
The analyst said when he first started covering companies in the space, he was confused about why anyone was favoring Canadian operations based on the financial results and business models of US operators.
He explained that a large base of US investors were taught to look for Canadian cannabis investments with no meaningful business operations in the US, since these companies have reached senior exchanges like the NASDAQ and the NYSE.
Karnes said he prefers the US side of the industry and has been lukewarm on the performance of the Canadians. He expressed disappointment at the management teams of Canadian operators, saying they have continually missed financial targets and are bleeding cash.
He also pointed the finger at the management teams of Canadian companies that may have adequately known the ins and outs of the cannabis plant, but weren’t capable of managing street expectations.
On the flip side, Karnes was positive about the track record for US operators that have had to conduct business under the shadow of the drug’s federal illegality.
M&A and banking for cannabis operators
Carroll said he expects to see M&A accelerate in the cannabis space, particularly in the US.
The panelists agreed that small private operators thriving in individual state markets will be acquired soon enough by bigger publicly traded names as they try to expand their footprints across the US.
“At the end of the day, we are at the very beginning of what I think is going to be a big M&A boom in cannabis,” said Carroll. “To the point that it’s even part of my investment thesis.”
Karnes was asked to explain the irregularities US cannabis operators face in relation to banking needs.
Due to the federal illegality of cannabis, businesses are barred from accessing the same banking options that other companies would be able to use, leading many operators to deal in cash.
While a division of the US Department of the Treasury has offered guidelines for cannabis businesses that are currently operating within particular state rules, that hasn’t drastically moved the needle for banking needs in the industry, Karnes said.
“There’s an enormous compliance burden, and these banks have to ensure that their clients are in conformity with this requirement. Many banks, particularly the larger ones, don’t want to take that risk.”
The advisor indicated that the industry is hopeful about the effects of the SAFE Banking Act, a proposed piece of legislation that passed the US House of Representatives and was reintroduced in March. This policy would give cannabis businesses the opportunity to perform banking activities.
However, Karnes warned that even if the policy makes it all the way through, he wouldn’t expect a massive influx of capital into the cannabis industry right away.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.