5 pot sector trends to watch in 2020, U.S. looks brighter than Canada

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For the most part, 2019 was a year to forget for the cannabis sector. 

In Canada, the legal market stumbled on a number of fronts; failing to meaningfully put a dent in illegal sales; struggling to open enough retail stores; and legalizing cannabis vaping devices as three provinces suspend sales due to health concerns. The list goes on.

Licenced producers saw billions wiped off their balance sheets as shareholders balked at dismal financial results that shattered the investor euphoria leading up to legal recreational sales. 

In the United States, the sector grew under a patchwork of state-level legislation at odds with federal law. In November, the U.S. House Judiciary Committee approved a bill that federally legalizes cannabis. But the Marijuana Opportunity Reinvestment and Expungement Act, or MORE Act, will face steeper odds in the Republican-controlled Senate. 

As the year drew to a close, the Horizons Marijuana Life Sciences ETF (HMMJ.TO), a basket of Canadian cannabis growers, fell to a record low, losing 43 per cent in 2019. Meanwhile, the actively-managed Purpose Marijuana Opportunities Fund (MRJOF) fell about 20 per cent, withstanding the worst blows in large part due to a pivot to U.S. pot stocks. 

Cantor Fitzgerald analyst Pablo Zuanic expects that theme to play into 2020, as he sees more positive developments on the horizon in the U.S. than Canada this year.

Here are five things he’s watching for:

Congress will likely pressure the FDA to set guidelines for CBD. 

The passage of the 2018 U.S. Farm Bill set the stage for a wave of CBD-infused products. The non-intoxicating cannabis compound has gained massive popularity for its perceived wellness benefits.

According to Cowen, nearly seven per cent of Americans are already using CBD products, with the market forecast to rise to 25 million consumers who would spend a total of US$16 billion by 2025.

Massive companies like Unilever (UN) and Anheuser-Busch InBev (BUD) have announced plans to sell CBD. However, the U.S. government has not concluded that CBD is “generally recognized as safe” for use in human or animal food. 

“Several specialists we have spoken with expect Congress to put pressure on the FDA to set clear guidelines on what products will be allowed, on requirements and standards, and on enhanced enforcement,” Zuanic wrote in a report.  “We see this as positive for the larger CBD companies that have a strong brand name, science to back up their claims, and a secure supply chain.”

Some form of the SAFE Act should at least make it to a vote in the Senate

Like the MORE Act, the SAFE Banking Act cleared a vote in the House last year and requires passage in the Senate before becoming law. The legislation would allow financial institutions to work with cannabis companies without fearing retribution.

“Passage of the SAFE Act would allow players greater access to capital, which itself would bring greater transparency,” Zuanic wrote. “We expect the Senate to take action and pass some version of the SAFE Act, likely pruned and stricter.”

Headlines from Illinois and New Jersey putting recreational cannabis on the ballot this November will likely pressure other states

Illinois became the eleventh state to allow recreational cannabis on Jan. 1. According to state officials, almost $3.2 million worth of pot was sold on the first day. Zuanic expects positive news for legal cannabis in New York, Connecticut and Pennsylvania in the coming months.

“The idea of a domino effect should not be discounted,” he wrote. “Illinois may provide a blueprint regarding issues like social equity and transparency. In our view, with more states going recreational, this will put pressure on Congress to pass measures like the SAFE Act.”

Slow Canada

Canada had a significant head start on cannabis, becoming the first G7 nation to legalize the drug on Oct. 17, 2018. But there have been a number of missteps, particularly in Ontario, where only about two dozen physical stores have opened. The province recently abandoned its lottery system to award new store licences. New stores are expected to be authorized at a pace of 20 per month, beginning in April. 

“Canada may only plod along,” Zuanic wrote. “We worry consensus sales expectations remain high.”

Little progress expected in Europe

Medical cannabis sales to European nations, Germany and Denmark in particular, are highly prized by Canadian licenced producers. However, the number of kilograms crossing the Atlantic has been slow to increase despite growing demand. 

“Europe, as an outlet, may not be a meaningful factor in 2020,” Zuanic wrote.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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