Keep an eye on these two US cannabis stocks, says PI Financial

PI Financial’s Jason Zandberg says Ohio could be the next big US cannabis market, after a marijuana advocacy group recently moved the state potentially a step closer to adult-use legalization. In a sector update to clients on Wednesday, Zandberg said two companies investors will want to keep an eye on in Ohio are Columbia Care (Columbia Care Stock Quote, Charts, News, Analysts, Financials CSE:CCHW) and Cresco Labs (Cresco Labs Stock Quote, Charts, News, Analysts, Financials CSE:CL).

Ohio passed a bill in 2016 to legalize cannabis use for medical purposes and then issued its first licenses in 2018. The market has grown substantially over the years to now almost $400 million in legal sales statewide and over 230,000 registered patients. 

But a group called the Coalition to Regulate Marijuana Like Alcohol has been collecting signatures for adult-use legalization and earlier this month they submitted a batch of almost 30,000 that could be enough to either force lawmakers to take up the issue or, with an additional push for signatures, put adult-use legalization on the ballot for this November’s midterms. The Coalition is now waiting for validation of the signatures with the outcome potentially being another rec use cannabis market opening up in the US. 

And at close to 12 million in population, Ohio would be a substantial addition to the growing list of states with legal rec pot, Zandberg said.

“If Ohio decides to legalize recreational sales, it would be the fourth largest legal cannabis state (by population) in the US behind California, New York and Illinois and ahead of Michigan and New Jersey. For example, two states with similar populations, Illinois and Michigan, legalized recently and both surpassed $1 billion in sales in their second year,” Zandberg said.

“Ohio’s Medical cannabis market reached its stride in 2021 achieving ~$390 million in sales based upon our estimates of unreleased December sales. Sales in 2021 were almost double from the 2020 sales number of $227.5 million,” he wrote.

Zandberg said of the multi-state operators (MSO) in the US the companies likely to benefit the most from the development in Ohio would be those who already have significant footprints in the state’s medical market. That market currently has 57 dispensary licenses, with the state having put a cap of five licenses for each individual MSO. This week, authorities plan on holding a lottery for an added 73 store licenses. Currently, there are five MSOs with the maximum five dispensaries in Ohio, each with one cultivation and production facility: Acreage Holdings, Green Thumb Industries, Verano Holdings, Columbia Care and Cresco Labs.

Zandberg has his preference for Columbia Care and Cresco.

“Based on the uplift in sales cannabis markets achieve when transitioning to adult-use, investors should position themselves into companies with large exposure to Ohio,” he said. “We like Columbia Care and Cresco Labs because they both have the maximum of five allowable retail licenses in the state. Additionally, they are both well positioned to take advantage of further demand brought-on by adult-use sales because of their scaled cultivation and production facilities.”

Cannabis stocks have been hit hard over the past 11 months and that includes Columbia Care and Cresco Labs. The stocks finished 2021 down 54 per cent and 33 per cent, respectively, and both have slid marginally further over the past few weeks.

In their favour, Zandberg noted that Columbia Care has 118,000 sq. ft. of available cultivation and production capacity across two facilities in Ohio, which was a top-five market by revenue for the company over the third quarter 2021. For Cresco, Zandberg said it has a strong retail presence in the state and recently committed further with a $40-million investment to expand its cannabis cultivation and production facility in Ohio.

“[Cresco’s] investment will nearly triple the size of their existing facility and position CL to meet increased demand from adult-use sales,” Zandberg wrote.

The coalition’s efforts reportedly included submitting 206,943 signatures last year but authorities determined only 119,825 of those were valid. The group’s new instalment of 30,000 could very well put it over the hump, where the Ohio secretary of state had reportedly said the petition was about 13,000 signatures short as of January 3. If and when the required 132,887 number is reached, legislatures will have four months to decide whether or not to act on the proposed legislation. If they don’t pass the bill or an amended version, there’s an opportunity for the measure to go on the November state ballot, if another 132,887 valid signatures are collected.

The proposed legislation calls for the issuing of 40 recreational cultivation licenses and 50 adult-use retail licenses along with a ten per cent tax on retail sales and an opt-out option for individual municipalities.

“The proposed measures would benefit current operators in the medical market because the proposal requires regulators to issue adult-use licenses to operators with medical operations within nine months,” Zandberg said.