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Stock Analyst Update

Cannabis Stocks Rally from Senate Results

Despite the rally, actual economic exposure differs widely.

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On Jan. 5, Georgia held runoff elections for its two Senate seats. Major news outlets have called the election for the Democrats, ousting both Republican incumbents and leaving the Senate evenly split. Under a 50-50 split, Vice President-elect Kamala Harris would cast the tiebreaking vote, effectively giving control to Democrats. With control of the White House and both chambers of Congress, President-elect Biden has received an accommodative path for his agenda.

Following the results, cannabis stocks rallied by mid-single-digit to midteens percentages amid optimism for federal legalization. Since the beginning of November, the sector has rallied massively by 40% to 150%, far outpacing the market’s own impressive 14% return.

For U.S. federal legalization, U.S. multistate operators Curaleaf (CURLF) and Green Thumb (GTBIF) have the most economic exposure, though we see them as fairly valued following the massive rally. Only Canadian producers Aphria (APHA), Aurora (ACB), and Tilray (TLRY) look undervalued, but these companies lack economic exposure to U.S. THC markets.

We continue to believe that federal legalization will take place by the end of 2023, most likely in the form of states’ rights that allow each state to decide legalization for recreational and medical cannabis. Still, we’d caution investors on the election result.

First, even with a Democratic-controlled Senate, major cannabis legislation would likely require 60 votes. This creates some uncertainty around the timing and form of any potential legalization.

Second, except for Canopy’s (CGC) standing deal to acquire Acreage, Canadian producers have no THC exposure to the U.S. market. Nevertheless, these stocks have rallied massively from election results. In reality, the Canadian companies would have to acquire or build a presence in the U.S. Meanwhile, U.S. producers like Curaleaf and Green Thumb continue to build a strong competitive position. The longer it takes for U.S. federal law to change, the harder it will be for Canadians to enter and effectively compete.

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Kristoffer Inton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.