Pubdate: Wed, 21 Oct 2020
Source: Wall Street Journal (US)
Copyright: 2020 Dow Jones & Company, Inc.
Author: Carol Ryan


A victory for the Democratic Party in next month's presidential
election would be a game changer for the cannabis industry. Despite
their reputation for overexuberance, pot investors are reacting with
level heads.

Since mid-August, the 10 largest North American pot stocks by market
value are up 20%, according to Viridian Capital Advisors. This is
relatively muted compared with the 83% rally seen in the three months
before the 2016 election.

Americans have been buying a lot of pot during the Covid-19 pandemic,
which may also explain why stocks are rising. Sales in seven large
states where cannabis is legal, tracked by research company Headset,
were up 51% from January through September compared with the same
period of 2019. Consumers have had more leisure time at home and
federal stimulus money to spend. Alcohol companies have enjoyed
similar tailwinds.

"Retail sales are much higher than expected, even in mature markets
like Colorado," says Karan Wadhera of cannabis venture-capital firm
Casa Verde.

Still, large U.S. pot stocks have outperformed their
better-established Canadian peers since July, hinting that politics
also are at play. If the polls are correct and Joe Biden is elected
the 46th president of America, U.S. pot growers stand to benefit
disproportionately from any changes to cannabis laws.

During the recent vice presidential debate, Democratic candidate
Kamala Harris said a Biden administration would decriminalize
cannabis. That would remove several big headaches for the industry.
Institutional investors won't buy shares in a U.S. cannabis grower
while the drug remains federally illegal, and a predominantly retail
shareholder base creates unhelpful volatility in pot stocks.
Crucially, U.S. cannabis companies can't get the regular bank
services, such as a mortgage or credit line, that other businesses
take for granted. This leaves the industry reliant on dilutive equity
raises and expensive debt to fund deals and expansion plans.

If President Trump hangs on to the White House, the industry may still
benefit. A Democrat-controlled Senate would be likely to pass cannabis
bills such as the Safe Banking Act, which would give companies access
to mainstream financial services.

Considering how wrong the polling data was back in 2016, investors are
understandably cautious this time around. They have also learned the
hard way not to believe all the hype in the cannabis sector. The North
American Marijuana Index dropped around 45% over 2019 as sales and
profits came in well below expectations.

The pot industry has more riding on this election than most. Whatever
the result, it is a good sign that cannabis investors are becoming
harder to impress.
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