Cannabis legalization measures will go before voters in five U.S. states on election day, Nov. 8, as the industry continues to grow.
While smaller in population than many other U.S. states, the five states with measures on the 2022 ballot would still add about 13 million to the number of adults in the U.S. with the legal right to possess cannabis for personal use, if all of the measures pass.
The ballot initiatives come after President Joe Biden earlier this month recommended the review of cannabis as a Schedule 1 controlled substance, although any changes could be years away.
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Maryland and Missouri each have about 4.8 million adults, followed by about 2.3 million in Arkansas, about 675,000 in South Dakota and 589,000 in North Dakota.
Arkansas, Maryland, Missouri, and North Dakota citizens will vote on whether to allow sales for adult use, while the ballot question in South Dakota asks whether possession of cannabis should be legal for adults but wouldn’t establish retail sales.
If all five states pass the measures, nearly half of Americans would live in states that have legalized cannabis for use by adults, said Aaron Grey, an analyst at Alliance Global Partners.
A recent poll in Maryland shows 73% of voters approve of the measure, while 59% of voters in Arkansas supported the measure in a September poll, according to data from Alliance Global Partners.
However, only a minority of voters have expressed support in Missouri (43%), North Dakota (39% in a July poll) and South Dakota (44%).
If any of the measures on the 2022 ballot pass, the number of people in Congress representing pro-cannabis states would increase, Grey said.
“We see the additional Senators and House reps representing adult use states as adding to the momentum and [pushing] lawmakers to reconcile differences between state and federal law,” Grey said in his research note, published on Tuesday.
If Maryland passes its referendum, it will join other nearby states, such as New York and New Jersey, that have legalized adult-use cannabis, and could potentially turn up the pressure on Pennsylvania to expand its medical program to include adult use, Grey said.
The election season comes as cannabis continues to rise in popularity, even among Republicans, who currently have an edge for retaking the U.S. Senate.
A poll of 1,000 GOP voters released in September by the National Cannabis Roundtable revealed that 73% favor legalizing cannabis for medical purposes, while 47% favor legalizing cannabis for adult use, compared with 46% who oppose it.
The poll also showed that 73% of Republicans agree that legal cannabis businesses should be entitled to the same rights as other businesses. Sixty-five percent of Republicans favor access to the banking system for legal cannabis businesses.
All this is happening as sales of legal cannabis ramp up.
All told, the total addressable market for legal cannabis companies in the 15 states in Cowen’s coverage universe is about $26 billion in 2022 and will be $42 billion by 2026, according to Cowen analyst Vivien Azer.
Despite this growth, cannabis stocks have fallen substantially this year amid lackluster prospects in Congress for federal legalization as well as overall stock-market weakness on expectations of a recession.
Morgan Paxhia, co-founder of Poseidon Investment Management, who launched the AdvisorShares Poseidon Dynamic Cannabis ETF
PSDN,
in 2021, said fair value for high-quality cannabis names could be about double where it was as of Sept. 30.
Elections have generally been good for the industry, as more states vote to allow adult-use or medical programs. In the 2020 elections, New Jersey and Arizona voters approved measures, and those states have ramped up adult-use programs since then.
“Election season — that’s how this industry generally makes its big steps forward,” Paxhia told MarketWatch. “Every two years, we get ballot initiatives.”
Weakness in cannabis stocks stems partly from a lack of long-term institutional investors, many of which are prevented from buying into the U.S. sector because cannabis remains banned under federal law.
“Individual investors have been hit on a lot of different fronts,” Paxhia said. “They had crypto and tech stocks go against them, and cannabis. They’re seeing high-frequency trading that has been beating them on the trades, and the hedge funds have been shorting cannabis. There’s a structural imbalance. Without strong buy-side support it’s been a one-way trade, and we’ve had a retrenchment in the cannabis space.”
Without a lot of institutional support for cannabis, and with weak equity markets preventing stock sales and initial public offerings, the cannabis sector remains short of capital.
“The recipients of the last capital inflow [prior to 2022’s downturn] were the largest companies,” Paxhia said. “You have a lot of companies in our space who aren’t going to make it — their fundamentals are not supported and/or are capital starved and [they] won’t make it through [because] you have a challenged environment right now.”
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The industry is expanding at a double-digit compound annual growth rate, with underlying companies growing 15% to 20%. The industry continues to face price compression, but the cannabis business is reaccelerating even as the economy is slowing, he said.
Demand at the macro level is slowing, but cannabis has regulatory-driven growth potential, with new states and municipalities opening up.
Among consumer packaged-goods companies, alcohol and tobacco companies are looking at the space, Paxhia said.
“Cannabis and alcohol have an interesting relationship. The younger generation is drinking less but they like cannabis,” Paxhia said. “If you’re an alcohol company and thinking about the next 10 or 20 years, you have to think about being where the next cycle is going to be.”
For its part, the AdvisorShares Poseidon Dynamic Cannabis ETF is down 60% so far in 2022, compared with a loss of 70.4% by the AdvisorShares Pure U.S. Cannabis ETF
MSOS,
a drop of 59.1% by the Global X Cannabis ETF
POTX,
and a loss of 65.1% by the Cannabis ETF
THCX,
“People look at the stock prices and say the industry is in trouble, but those few stocks don’t represent the entire industry,” Paxhia said. “There’s just more selling than buying this year. We know how quickly that can change. The volumes that traded post Biden’s announcement generated record-high daily volumes that took place in one hour. The shorts seemed programmatic in covering, or were getting scared and trying to reduce their exposure very quickly.”
In 2012, Colorado and Washington were the first two states to legalize adult-use cannabis. Nineteen states now allow it, as do Washington, D.C., and Guam. Medical use is legal in 39 states.
