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Illinois Officially Makes Marijuana History, and These States May Be Next

Sean Williams, The Motley Fool

The legal cannabis industry is budding before our eyes, and the United States is its crown jewel. Although cannabis remains an illicit substance at the federal level, it hasn't stopped 33 states from legalizing medical marijuana in some capacity.

According to a newly released report, "State of the Legal Cannabis Markets," from Arcview Market Research and BDS Analytics, global licensed-store weed sales could nearly quadruple between 2018 and 2024 to $40.6 billion. But total cannabinoid market sales -- this includes pharmaceutical cannabinoid sales and the sale of cannabidiol (CBD)-based products in general retail stores -- may hit nearly $45 billion in the U.S. alone by 2024, making it the "greenest" market in the world.

This past week, one of the most important states in the blossoming U.S. weed market made expected, yet long-awaited, history.

A judge's gavel next to dried cannabis buds.

Image source: Getty Images.

Illinois makes it official (finally)

On May 31, the Illinois Legislature passed HB 1438, a bill designed to legalize recreational marijuana, as well as expunge the criminal records of nearly 800,000 residents in the state who possessed or purchased up to 30 grams of cannabis (without violence). As is the case with previous cannabis bills, HB 1438 imposes excise taxes on recreational weed sold: 10% for products containing less than 35% tetrahydrocannabinol (THC), and 25% for products with higher concentrations of THC. (THC is the psychoactive cannabinoid that gets users high.)

The big question had been: When would Gov. J.B. Pritzker (D-Ill.) sign the bill? Pritzker had stated support for the legislation, and his intent to sign it, but multiple weeks had gone by with the bill collecting dust on his desk. On Tuesday, June 25, Pritzker finally made good on his word and signed HB 1438 into law, making Illinois the 11th state to have legalized recreational cannabis use, and the 10th to allow for retail distribution.

Illinois also made history in the process, becoming the second state legislature (along with Vermont) to approve recreational weed use, but the first to also legalize recreational distribution. Vermont doesn't allow cannabis to be sold in retail stores, and the other nine states have legalized marijuana through the statewide ballot process.

Legal pot sales are slated to begin on Jan. 1, 2020, with Arcview and BDS Analytics projecting $1.14 billion in statewide sales by 2024. 

A black silhouette of the United States, partially filled in with cannabis baggies, rolled joints, and a scale.

Image source: Getty Images.

These states are aiming to legalize adult-use cannabis in 2020

Of course, Illinois isn't alone in the legalization department. Quite a few other states are seriously discussing recreational pot legalization, though most won't have a real shot at expansion until 2020.

For those who might recall, I'd noted previously that Ohio had a legalization initiative that had been sent to state regulators for review, with the hope of having it placed on the 2019 ballot for November. That effort has fallen through, meaning there aren't any major marijuana ballot initiatives or amendments expected this coming November. That's why most cannabis legalization support groups have been shifting their focus to the 2020 elections.

There are a few adult-use initiatives pending ballot review in 2020 that I don't believe stand a chance. For instance, both Mississippi and Nebraska, two states that are historically run by Republicans, have legalization initiatives under review. However, the GOP usually has a much more negative view on cannabis when compared to Democrats or Independents. That makes legalizing recreational marijuana in these states a long shot.

Five states far more likely to put recreational weed initiatives or amendments to vote in 2020, or simply pass legislation to allow recreational marijuana to be sold, are (in no particular order): New Jersey, New York, Arizona, Florida, and Maryland.

Even though New York and New Jersey have been actively discussing recreational legalization measures in their respective legislatures, my money would be on Arizona to be the likeliest to legalize in 2020. The Grand Canyon State has two factors working in its favor. First, cannabis legalization groups have planned to focus their efforts on Arizona, among a select few states, in 2020. And second, Arizona narrowly lost its bid to legalize recreational weed in 2016 by roughly 2 percentage points. Historically, the second time a state votes on a recreational pot initiative after the initial proposal failed, it passes. It happened in California and Oregon, and my suspicion is Arizona will be added to that list in 2020.

I'd also look for cannabis groups to really ramp up their efforts to push legalization amendments in Florida. The Sunshine State could easily become a top-three revenue-producing state by 2024, with close to $1.9 billion in annual sales.

Clearly labeled jars of unique cannabis strains on a dispensary store counter.

Image source: Getty Images.

This is why multistate dispensaries are paying big premiums for acquisitions

All told, there could be more than a dozen states that surpass $1 billion in annual sales by 2024 as adult-use legalizations pick up, which is a big reason why we've seen so much dealmaking -- and such high premiums -- in the vertically integrated dispensary space.

For instance, the largest all-U.S. deal in history (about $950 million) was announced at the beginning of May between Curaleaf Holdings (NASDAQOTH: CURLF) and privately held Cura Partners, which owns the Select brand. Select products are currently sold by more than 900 retailers nationwide. Curaleaf currently has more operational retail stores (45) right now than any other multistate operator, and it's looking to expand its presence in 12 states, including Florida, which is where roughly half of its stores are located. The addition of Select, while pricey, further helps establish Curaleaf's brand presence in these burgeoning markets. 

Then there's Cresco Labs (NASDAQOTH: CRLBF), which is in the process of acquiring Origin House (NASDAQOTH: ORHOF) for $823 million in an all-stock deal. The sizable premium being paid for Origin House will allow Cresco Labs to get its in-house-branded products into more than 500 California dispensaries, as well as any other markets where Origin House lands cannabis distribution licenses.

Cresco Labs also stands to benefit from the legalization of recreational marijuana in Illinois, where it has five dispensaries, but expects to increase this number to the state maximum of 10 by the time recreational pot sales kick off on Jan. 1, 2020. 

In short, there's plenty of opportunity for recreational cannabis growth in the U.S., and pot stock investors should look for continued consolidation activity ahead of what could be a very active 2020 on the legalization front.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Origin House. The Motley Fool has a disclosure policy.