If Biden wins you would likely see some jump in cannabis stocks: Expert

Kris Krane, 4Front Ventures President joins the On the Move panel to discuss the impact of COVID-19 on the cannabis industry and what may or may not change in the industry depending on the outcome of the 2020 presidential election.

Video Transcript

JULIE HYMAN: --and it's been a sort of up and down year. Both for the fundamentals as well as for the shares. Let's talk about the outlook, however, with Kris Krane, 4Front Ventures CEO. Kris, it's good to see you. You recently wrote two different pieces, where you looked at the different cases for what marijuana policy could look like under a Biden/Harris administration. One said that there wouldn't be an improvement, and one said that there would. So, you were sort of arguing both sides of it. Which side do you think is more likely?

KRIS KRANE: I think it's more likely that we will see reform. The question really is, what that looks like. The most positive news here is that Senator Harris-- while she had a somewhat spotty record on this issue as a prosecutor-- has been one of the more supportive senators in the United States Senate calling for cannabis policy reform, including being the lead sponsor of the MORE Act. Which, it looks like, is poised to pass the House in a couple of weeks, and would likely be the vehicle for legalization or descheduling under a Biden/Harris administration.

JULIE HYMAN: And, do you hold that view to such an extent that-- well, first of all, do you think Biden and Harris will win? And secondly then, are you making investments with that in view, that we will be seeing a loosening of policy?

KRIS KRANE: So, as to whether Biden and Harris will win. I tend to trust the FiveThirtyEight forecasts and the professionals on that, and right now the outlook is much more likely that they will be in power next year, than Trump. But we've got two more months to go. So I wouldn't make any solid bets on that at this stage.

As far as how this might impact the market next year-- I think if Biden were to win, you would likely see some jump in cannabis stocks. I think it would be a positive sign to the market that reform is likely coming. As far as when that would happen-- that's a big open question. This administration would come in with a number of issues that they need to face that have nothing to do with cannabis, that would likely be the top priorities.

That said, this has been a major priority for Kamala Harris, who would be the Vice President. It's quite possible that her Senate colleagues would want to send her signature bill to the administration for signature. And the MORE Act has been, arguably, her signature bill in the Senate. So it is quite possible that even in the first year of a Biden administration we would see some significant movement, if not full legalization.

And I think the impact on cannabis, particularly publicly traded cannabis stocks, really can't be understated. Most cannabis stocks right now are quite low, when compared to other major companies, and even when compared to their Canadian counterparts. There is a tremendous amount of room to grow amongst cannabis companies and cannabis stocks.

And the United States, is arguably the most lucrative and largest cannabis market in the world that has not been even close to fully realized right now, with it only being legal in 13 states, and no federal legalization or federal oversight to speak of. So there's only blue sky ahead for the cannabis industry.

BRIAN CHEUNG: Kris, it's Brian Cheung here. So you laid out a pretty nice overview for what the future outlook might be. But I wonder if we look backwards, at the reason for why some of these cannabis stocks have been trading so low-- it's been a very rocky year for the cannabis stocks-- but what does that have to do with the COVID crisis? When it comes to supply, I know that was an issue even before we had a pandemic globally, but has that affected specifically the Canadian producers, who before all this were already having trouble in some instances trying to find a supply to meet the demand that was up there?

KRIS KRANE: So I actually don't think COVID has had a major impact on these stocks, either in the United States or in Canada. I think the reason for the volatility has been elsewhere. In fact, under COVID, particularly in the United States, we've seen demand and sales go up. And go up consistently throughout the COVID crisis.

What I think has happened in respect to these stocks has been, in the United States the valuations were largely based on speculation, up until a little over a year ago. Which companies were likely to be the largest, who had the most licenses, and where were those. And there was a shift in how the market was valuing these companies in about the middle of last year, from speculation to more traditional metrics, right. eRevenue, EBITDA, and very few of those companies were meeting those metrics.

And so what we've seen, in particularly the second half in 2020, or the last few months in 2020, is a number of stocks have gone up. And those are the ones that are proving that they can really operate, that they can drive revenue, that they can drive EBITDA. The ones that have stayed low and stayed flat have been ones that I would largely call license aggregators. Companies that were spending their time acquiring licenses, but not necessarily showing that they could-- that they had good business fundamentals and an ability to operate.

In Canada it's a little bit different. A lot of the speculation in Canada that was driving the stock values was around international markets. And a lot of these Canadian companies were aggregating and acquiring international licenses all around the world. But what's happened over the last year is the international market hasn't really developed.

There is very little demand for cannabis internationally, there are very few countries where it's legal, even medicinally, and in most of those medical markets the number of patients are quite small. And so there's been a bit of a reversion to, again to the fundamentals in Canada, in terms of who's actually performing and driving revenue.

And I think we've seen that as well in the shift in a lot of the C-suites of these Canadian companies from folks that were good stock promoters, good license aggregators, good storytellers, to real operators. And I think that's what's going to drive valuations going forward. And the companies that can prove that they can operate are going to continue to see their values go up. And those that are trying to play in the stock promotion and aggregation game are likely to remain flat.

JULIE HYMAN: Kris, squarely to your point, we saw another announcement of a change in management today with the Canadian operator, Aurora. They announced first of all, a 2 Canadian billion impairment charge, and they announced the appointment of Miguel Martin as the new Chief Executive. He had been at the company already.

Now I don't know if you can speak to Aurora specifically, but it seems like if you look at the Canadian business versus the US business, you're going to have to expect that we're going to see some of the same shakeouts occur in the US as the industry here matures as well.

KRIS KRANE: We are and we're already seeing it. I think the difference though in Canada is that the Canadian valuations were really driven by international speculation. That there was going to be a big international cannabis market that would have developed relatively quickly, and that simply hasn't happened.

And for a Canadian company to achieve the type of results that would justify the kind of valuations that we've seen, they have to be able to dominate internationally. Because there's only 36 million people in Canada. It's a small market on it's own. There's more people in California than there is in Canada.

Whereas-- so, in the United States when you have multi-state cannabis companies here that have a national reach in the US, there is a much larger population of consumers for American cannabis companies to reach, to justify valuations, even without taking the international markets into account. So I think that's what we're seeing now with the Canadian markets in particular. And if they are going to be successful, they need to be the kinds of global dominating companies that they have told the market they're going to be, and that to date has not really been realized.

JULIE HYMAN: Kris, bringing the conversation back to the US. You laid out what the federal policy could look like under a Biden/Harris administration. In the short term though, what are you seeing on a state level? There's been a lot of talk about using cannabis as a way to basically plug the revenue shortfall we've been seeing as a result of COVID.

KRIS KRANE: Absolutely. I think 2021 is going to be the year when we start to see state legislatures really take action on this issue. You know, politicians at the state level-- and at the federal level, to be fair-- have been behind the public on this issue for decades. And what we've-- so we've gotten to this point now where we have 13 states where it's legal. But only one, my current home state of Illinois, has done so via the state legislature.

But there are a handful of states that have gotten close, and that I think are because of the budget shortfalls due to COVID, are likely to take a much more serious look at this next year. And likely to get less bogged down in the details, because of the economic situation. So I would look at states like New York, New Jersey-- which will actually probably pass it by ballot initiative this year-- Connecticut, Rhode Island, New Hampshire, New Mexico.

All of these states have indicated that they are serious about looking at legalization. And I think you'll see some combination of those pass legalization next year, and maybe even some others that we aren't really thinking about or talking about right now.

JULIE HYMAN: And that's already quite a list. Kris Krane, thank you so much, appreciate it. Good to see you. 4Front Ventures President, Kris Krane.