While America continues to tally mail-in ballots to clarify who the next president will be, the next wave of cannabis legalization is already well on its way. On Tuesday night, there were five states with cannabis on the ballot, all of which were approved in a green sweep. Our focus in Purpose Marijuana Opportunities Fund (MJJ) has been on Arizona and New Jersey, the most populous states with initiatives, both of which are highly exciting.
1. Arizona (population 7.3 million) is currently one of the largest medical cannabis markets in the US with more than 260,000 patients and 122 dispensaries. With future programs already planned out, sales are expected to start as soon as January 2021. Market size is expected to reach $750 million within three years and top $2.2 billion at maturity. The Fund has exposure to this legalization with positions in Harvest Health, Curaleaf, and Vext Science Inc.
2. New Jersey (population 8.9 million) approves the commerce of adult-use cannabis, albeit the state is yet to develop legislation outlining the final rules for legalization. In a recent re-prioritization effort, the legislation could be tabled as early as this month, although the market is broadly expected to be operational by the third quarter of 2021. A limited-license state, New Jersey has the potential to be a billion-dollar market within three years of legalization and greater than $2.5 billion at maturity. The Fund has a high exposure to this legalization with anchor positions in dominant players CuraLeaf, TerrAscend, Green Thumb and Columbia Care.
A blue sweep by the Democrats seems unlikely at this point. Having the party take the White House and Congress would likely have led to the most mass-scale proliferation of cannabis. However, under the current situation, we do see upside for US cannabis operators.
First, the domino effect in the northeast US is now in play. With New Jersey legalizing adult-use cannabis, New York and Pennsylvania (both having strong medical cannabis programs) will be eager to move forward in their adult-use cannabis reforms. We have already observed momentum in the respective states and loss of taxes from cross-border commerce is only going to accelerate the cause.
Lastly, an interesting situation has taken hold in the US Senate, where the barriers to broader proliferation have historically been positioned. Eight sitting Republican senators now belong to states that have legalized adult-use cannabis. This could possibly tilt the scales when it comes to passing of the SAFE Act. The current $18 billion industry runs on cash and making SAFE banking available to the industry will massively increase efficiency, cut operating costs and, most importantly, lower the cost of capital for US operators.
Although a blue sweep would have been the best-case scenario for immediate monetization of locked value in this industry, the current scenario is also largely positive and elongates the entry point for many investors to take advantage of a smoother revaluation versus a step-up process. We continue to be excited about this industry and the value creation on offer in both the short and long terms.
— Nawan Butt, CFA is one of the Portfolio Managers of Purpose Marijuana Opportunities Fund (MJJ).
All data sourced from Bloomberg unless otherwise noted.
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