With the legalization of adult use cannabis in New Jersey, it was widely expected that New York leaders would find a way to reach agreement on a legalization bill. This proved to be the case as on March 31st, Governor Cuomo signed into law the rules and regulations for adult use cannabis in the state of New York.
It is estimated that given its population and the amount of tourism that NY attracts each year, that the state could become a $4 billion cannabis market in the next few years. Given news like that, we would have expected that US cannabis names would have finished Q1 strong, however that was not the case. We offer our views on the drivers of this weakness below.
The Short Answer
Our view: We were buyers on the weakness
The Longer Answer
As the year began, the US Senate changed hands to the Dems and investors saw investment opportunities de-risk in US cannabis. By the middle of March though, the sense euphoria had changed. Federal legalization had not happened quickly. The threat of higher interest rates began to slow “growth stocks” including cannabis and tech because of a perceived weakness during rising rate environments. Then a major family office hedge fund fiasco caused further weakness in growth stocks as the Archegos collapse caused a ripple effect as US prime brokerage desks and related firms had to adjust books and force liquidations. Shortly thereafter, Credit Suisse issued a directive to all its clients stating that they would no longer accept trades or holdings of US cannabis companies. And then the Chicago Tribune printed a story negatively portraying Green Thumb Industries and its executives. Interesting note about the short report that was issued on GTII, it came from a hedge fund that also owns the Chicago Tribune. Putting further pressure on cannabis stocks at the quarter ended, was a suggestion that many compliance departments weren’t as excited with US cannabis holdings and asked fund managers to remove names from top holdings, avoiding quarterly financial statement disclosure.
These combined pressures on US cannabis stocks all took place while the legislation creating the 2nd largest cannabis market in the US, New York state adult use cannabis was unveiled. And to that story, what was the response; crickets!
We remind investors that federal legalization is not the short term driver, the state by state legalization of new markets is a significant driver as the TAM increases while non-US companies suggest they are well positioned to enter the US market. US MSOs and SSOs are taking advantage of the growing market, building brands, cultivation and distribution as now over 300 million Americans live in a state where there is some form of medical and or adult use legal cannabis industry.
While we doubt that the last few days will be the last volatile period in the sector, we continue to believe the environment for cannabis is improving. With NY moving to adult use, soon most of the population of the northeast will reside in adult use states. The momentum and the direction are clear. The only question is timing. Stay invested. And be rewarded.
Charles Taerk & Douglas Waterson
The Portfolio Team
Faircourt Asset Management
Sub-Advisor to the Ninepoint Alternative Health Fund
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