Cannabis stocks are still basking in the glory of a tremendous month of January which saw names across the sector post gains of 40, 50, in some cases 70 per cent. Going forward, there should be more where that came from, at least for the American pot companies, says legendary investor Danny Moses, who argues that once the US banks get involved, the nascent industry will really take off.
“I’ve never seen a sector have the political tailwinds, the economic tailwinds and the wellness tailwinds that this sector potentially has,” says Moses, one of a group who famously shorted subprime loans in the period before the financial crisis in 2008, to CNBC’s Fast Money on Thursday.
“The really interesting thing about the US companies, the multi-state operators, is that there’s no debt. The Big Short was about over-levered, under-regulated businesses whereas these are over-regulated and under-levered businesses. It’s really tremendous,” he says.
Moses points to the differences between Canadian and US cannabis companies, starting with their ability to raise equity. Where Canadian companies big and small, private and public, have been able to secure funds from investment bankers and, more recently, the large banks, due to the federally regulated nature of both medical and now recreational cannabis, the scene in the US is one of state-by-state differences in regulations and a federal level where marijuana is still classified as a Schedule 1 substance.
That could all change if and when legislation is passed to make it easier for US banks to lend to cannabis companies, with both the Secure and Fair Enforcement (SAFE) Banking Act and the Strengthening the Tenth Amendment Through Entrusting (STATES) Act coming into play, says Moses.
“The SAFE act would have the provisions to give the green light to banks to start lending, and there are two things that banks can do: banks can service these clients with everything from payroll to keeping their cash somewhere and also have the ability to issue debt,” he says.
“And I think we’ve already seen that the banks are looking for an excuse to come into the space, and if you were to get debt to come in, the cost of capital would come down dramatically for these companies. And I think that’s a really interesting play that people aren’t really focusing on right now,” he said.
Moses says that investors should be looking at multi-state operators in the US for whom the enterprise values are currently underestimated. For top picks, Moses lists five companies: iAnthus Capital, Acreage Holdings, Liberty Health Sciences, Kush Bottles and Cresco Labs. Notably absent are Canadian companies.
“I just think they’re expensive and I think the US names are much cheaper on a relative basis,” Moses says.