Why Should Cannabis Investors Pay Attention To Germany? These Stocks Will Benefit From Imminent Legalization

With US federal legalization stalled and its near-term outcome uncertain, cannabis stocks are taking a hit. Cantor Fitzgerald's analyst Pablo Zuanic advised investors to turn their interest to Germany, or at least for now.

"We suggest investors pay attention to Germany, as legalization there could result in the significant upside for a few NASDAQ-listed cannabis stocks," the analyst said in his 14-page market report released on Monday.

Germany's Move To Legalize Cannabis

Germany is paving the way toward legalizing marijuana use. With Olaf Scholz's government putting it on the list of its many priorities, it's only a matter of time before rules for the recreational cannabis program will be known. It's also worth pointing out that the majority of Europeans support the legalization of marijuana.

Germany decriminalized medical marijuana in 2016. In late 2021, leaders of the incoming parties said they had a formal agreement to legalize cannabis. "We are introducing the controlled supply of cannabis to adults for consumption in licensed stores," the now-ruling coalition said in a 118-page agreement. In July, the health department held hearings on various aspects of the issue.

Moreover, on a special episode of Germany's popular satirical "Heute Show," Karl Lauterbach, scientist, MD and politician, of the Social Democratic Party who serves as the Minister of Health came out personally in favor of the legalization.

"It was pleasant, I have to say. It brings back pleasant memories," Lauterbach said, adding that "the safety and security aspects of legalization have changed in the last years, in my opinion. I'm now for legalization."

Now, the Ministry of Health is working with other ministries to complete a draft before the end of summer break in September, which would outline a legalization framework. Zuanic said in his note that legalization prospects under a new government look bright.

"With a population of 84mn people (69mn age 18 or older), this could be a sizable market with above-average economics," the analyst said. However, "without knowing the rules, it is too early to issue market size projections," he added.

What's Next?

Once wrapped up, the draft would be reviewed by the cabinet and sent back to the MoH which would then come up with a final comprehensive bill poised to reach the two chambers of the German parliament.

"We expect this to be approved by both chambers," Zuanic said, with the approval and signing of the final law "sometime by 2H23."

Which Stocks Would Benefit Most From Rec Sales In Germany?

In a scenario where imports would be allowed, Zuanic expects recreational sales to kick off in 2024, or a year later, if the sales depend exclusively on domestic production.

"There could be a scenario of an earlier start to rec sales (without imports) if the current domestic producers are allowed to begin supplying the rec market, as per a scenario outlined by Demecan", which is the only domestic production licensee in addition to Aurora Cannabis Inc ACB and Tilray Brands Inc TLRY, the analyst added.

Moreover, foreign companies without production in Germany might have to rely on partnering with local companies in order to operate within the market, Zuanic said. To that end, Canadian cannabis producers Aurora and Tilray, which already produce cannabis in Germany, are the "best-positioned companies" among analysts' stock coverage. However, US MSOs like Curaleaf Holdings CURLF could benefit as well.

Together with the two cannabis giants, CannaMedical, Canopy Growth Corp. CGC, and Four20 Pharma accounted for more than 70% of the German flower medical cannabis market over the past 12 months.

In addition to Demecan, these five operators "may have a key role in Germany's future rec market," concluded Zuanic.

Photo Courtesy of Karlheinz Pape from Pixabay