This Week in Cannabis Investing: Legalization is Popular Ahead of Midterms
Surveys show support for legalization, Constellation changes up Canopy's US operations, and more.
This week, Canopy Growth Corporation made another major move. The struggling Canadian cannabis company announced the creation of Canopy USA, a new holding company which will consolidate its U.S. assets, reduce costs and clarify their entry into the U.S. market. Previously, Canopy had paid significant sums to acquire Wana Brands, Jetty, and stakes in Acreage and TerrAscend under conditional ownership terms that have not been met.
At the same time, its stakeholder Constellation Brands, the largest beer import company in the U.S., announced it will convert its existing common shares in Canopy into new exchangeable shares.
“We believe that the conversion of our ownership interest will maintain Constellation’s ability to realize the potential upside of our investment in Canopy,” said Bill Newlands, CEO of Constellation Brands.
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Canopy’s announcement seems to be driven by Constellation Brands’ interest in protecting these U.S. assets from the rest of Canopy. The Canadian business is showing continued stress, and we would not be surprised to see Canopy Growth face issues with creditors in the coming months. Constellation's desire to create a separate entity for U.S. assets does show confidence in the potential for SAFE banking to pass in the U.S. as early as next month during the lame-duck session.
Canadian Licensed Producers outperformed US operators following the announcement of Canopy USA, and Cannabis ETFs and their underlying exposures also rallied. Canopy shares led the day’s rally with a gain of ~27%. U.S. cannabis participated in the rally to a lesser extent, which we see as largely attributable to the structural imbalances created by Canadian LPs with access to listed exchanges versus their U.S. operating counterparts.
Charlotte’s Web Links Deal with Southern Glazer’s
Denver-based Charlotte’s Web was a real first-mover brand in the CBD category. Now the market leader in hemp extract wellness products, they’ve made headlines the past couple of weeks by becoming the official CBD sponsor of Major League Baseball and signing a distribution agreement with the major liquor distributor Southern Glazer’s Wine and Spirits.
"This exciting relationship [with Southern Glazer’s] is another step in delivering on our promise to shift our model to key multi-state distributor relationships in new industry verticals," said Jacques Tortoroli, CEO of Charlotte's Web.”
The normalization of cannabis and hemp continues, and mainstream industries want to tap into long-term growth potential that industry participants have been building on for many years. Charlotte’s Web is pushing the growth envelope after the CBD category went through a major boom or bust cycle. Oversupply in the market caused significant price compression and left many brands and operators out of business.
We understand the drive for growth from Charlotte’s Web as its balance sheet was not immune to the challenges noted above. It will be interesting to watch how this strategy pans out for the emerging brand as the current market environment is focused on fundamentals and balance sheet over brand narrative.
Support for cannabis legalization is skyrocketing
At Poseidon, we regularly comment on how cannabis relates to other social trends and moments in history. Over the years, support for cannabis legalization has been consistently growing in the polls, and same-sex marriage has been a regularly cited progression for how voter support can turn into federal action.
New polls from Monmouth University found that 7 out of 10 Americans are for legalizing small amounts of cannabis for personal use. Twenty years ago, those poll results would’ve been flipped, with only 3 out of 10 participants supporting legal cannabis. The numbers represent a large shift in voters’ feelings in a relatively short span of time, and same-sex marriage is the only cultural trend to produce such a strong shift in views from voters over a similar time period.
We think it is exciting to see cannabis reaching a very similar amount of public support as same-sex marriage. It’s not a coincidence that President Biden stepped forward as polling reached such strong support. The American people need to keep pushing forward to ensure that positive federal action is solidified.
Two In Three Americans Want SAFE Banking
Industry trade groups like the NAACP and the American Bankers Association are speaking out in support of SAFE Banking. The ABA conducted a poll showing that two in three Americans support Congress passing legislation allowing cannabis businesses to access banking services where cannabis is legal.
“Americans firmly believe that now is the time to resolve the ongoing conflict between state and federal law to allow banks to serve legal cannabis and cannabis-related businesses,” said ABA President and CEO Rob Nichols. “We urge Congress to pass the SAFE Banking Act this year to enhance public safety in the 38 states where cannabis is legal in some form.
Last week, the NAACP’s board of directors approved a resolution calling for the immediate passage of SAFE Banking.
“The SAFE Banking Act could enable cannabis businesses with social equity licenses, diverse ownership licenses, or other licenses made available by states with medical- and adult-use cannabis laws that aim to foster a diverse and equitable industry, to better compete in the industry if it was coupled with the federal descheduling of marijuana and explicitly provided for fair terms and rates for Black-owned and social equity licensed cannabis businesses,” the resolution says.
It is high time for Congress to act or face getting voted out of office. The voters are the boss, not elected officials, and elections are our opportunity to remind them that they are accountable for their actions. The message has been clear to Congress and the Senate to get the job done, or we need to vote-in officials that will. We look forward to seeing Americans turning up to the polls and making their voices heard.
Morgan Paxhia is Co-Founder of $PSDN ETF & Managing Director and Co-Founder of Poseidon Investment Management. With over 10 years experience in investing and finance, Morgan has developed a deep understanding of individual company analysis, portfolio construction, and risk mitigation. This content is not intended to provide any investment, financial, legal, regulatory, accounting, tax or similar advice, and nothing should be construed as a recommendation by Poseidon Investment Management, LLC, its affiliates, or any third party, to acquire or dispose of any investment or security, or to engage in any investment strategy or transaction. An investment in any strategy involves a high degree of risk and there is always the possibility of loss, including the loss of principal. This content should not be considered as an offer or solicitation to purchase or sell securities or other services. Any of the securities identified and described herein are for illustrative purposes only. Their selection was based upon nonperformance-based objective criteria. The content presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Past performance is not indicative of future results.
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