On October 17, Canada legalized the sale of cannabis-derivative products like vapes, edibles, and beverages. Also, the day marked the first anniversary of recreational cannabis legalization in Canada. However, the cannabis sector has underperformed the broader equity market this year. So far, the Horizons Marijuana Life Sciences Index ETF (HMMJ) and the ETFMG Alternative Harvest ETF (MJ) have fallen 26.1% and 21.4% YTD, respectively. During the same period, the S&P 500 Index has increased 19.1%. Regulatory scandals, vaping related deaths and illnesses, and expectations of a slowdown in cannabis sales in the second half of 2019 caused cannabis stocks to fall.
However, we expect cannabis legalization in more US states and across the world to drive the cannabis sector. Cannabis legalization efforts have been spreading across the US. Last week, we discussed how New Mexico could be the 12th state to legalize marijuana for adult-use and recreational purposes.
Previously, New York, Connecticut, New Jersey, and Pennsylvania tried to legalize adult-use cannabis. However, the states weren’t successful. On October 17, The Day reported that the governors from the four states met and agreed on basic guidelines for legalizing marijuana. The guidelines covered topics like the tax rate, advertising norms, the percentage of THC in cannabis products, and edibles.
As reported by The Day, Connecticut Governor Ned Lamont said that not all of the states will pass the same laws. Also, each state will have a different timeframe. He said that state officials will continue to coordinate with each other on the above topics.
Benefits of cannabis legalization
Cannabis legalization will help minimize illegal activity, create more jobs, and increase the state’s revenues from tax collection. On October 2, New Frontier Data published its research report on these matters. According to the report, if all 50 states legalize cannabis, 1.46 million jobs would be created over the next six years. Cannabis-related jobs would increase to 1.63 million by 2025. The report also estimated that the federal tax collections would be at $73.7 billion from 2018 to 2025 at a federal tax rate of 15%. Under full federal legalization, the total combined taxes, which include business tax revenues, payroll deductions, and 15% of retail sales tax, would be $175.8 billion from 2018 to 2025.
Legalization of marijuana
Currently, federal law prohibits cannabis. Marijuana is categorized as a Scheduled 1 substance. However, 33 states have legalized medical marijuana, while 11 states have legalized cannabis for recreational purposes. Cannabis players will be able to expand their businesses as more states warm up to marijuana.
US hemp business continues to grow
The US legalized hemp at the federal level in December 2018. Hemp is a type of cannabis that contains less THC (tetrahydrocannabinol) and more of CBD (cannabidiol). Notably, CBD helps treat various medical conditions.
In May, Aurora Cannabis announced a multiyear partnership with UFC to research whether hemp-derived CBD helps treat various medical conditions. On August 19, the company closed its acquisition of Hempco Food and Fiber. So far, Aurora Cannabis has lost 29.1% of its stock value YTD as of October 18. The lower-than-expected fourth-quarter revenues caused the company’s stock price to fall.
Canopy Growth plans to build an industrial hemp park in New York. During the first-quarter earnings call, the company announced that it acquired processing capabilities and hemp biomass to produce CBD products. Canopy Growth stated that it has planted thousands of acres of hemp plants with US farmers. On October 2, the company acquired a majority stake in BioSteel Sports Nutrition to expand its CBD business in the US. However, the company didn’t meet analysts’ expectations in the first quarter, which caused the stock to fall 27.4% YTD.
On September 5, Cronos Group acquired four subsidiaries of Redwood Holding Group, which manufactured and marketed hemp-based skincare and other consumer products under the Lord Jones brand. Cronos Group has lost 24.0% of its stock value YTD.
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