Even though recent declarations from officials in the Trump administration might suggest otherwise, the U.S. cannabis industry will continue to grow at a 27 percent CAGR over the next five years, hitting sales of $22.6 billion by 2021, Arcview Market Research revealed in its most recent "The State of Legal Marijuana Markets" report.
Benzinga reached out to Troy Dayton, CEO of the Arcview Group, to discuss this thesis.
The Bullish Thesis
The most important element to Arcview’s thesis is that, “no matter what the Trump administration does, there’s going to be a long line of people willing to take the licenses that the states are giving out, and then there will be a long line of people lined outside of each of those places to purchase cannabis,” Dayton explained.
So, while a federal crackdown could have an impact on who is running cannabis dispensaries, it is not very likely to affect their presence and their existence, the expert said. Similar should be the case from a financial standpoint.
“While a crackdown could impact the valuations of companies, and perhaps scare off some institutional investors or some larger, more risk-averse investors, it will simultaneously bring a bunch of other investors to the party because the long-term prognosis for the industry is so strong that they might see these dips in valuations and thinning of the herd of competition as a very unique opportunity to get value in this marketplace during this little blip.”
The other factor behind Arcview’s bullish thesis is that, contrary to popular belief, there is not that much the federal government can do against the states’ will, Dayton went on. “As [Attorney General] Jeff Sessions said, they’re not going to take over for local and state police; they don’t really have the resources for that. Also, they’re going to be focused on the opioid epidemic and a bunch of other things, so it really doesn’t make sense for them to put energy into this.”
Moreover, the expert said, cannabis legalization is a hugely popular issue. “If the Trump administration is looking for a way to be less popular, going after state-approved licensed facilities would be a great way to do it. So, I think if there is a crackdown it will be at the margins; it will be relatively limited in scope.”
“Certainly that would send shockwaves, but it’s unlikely to impact the growth. I think the growth sticks around no matter what,” he concluded.
Javier Hasse: In relation to the last part of your statement — this is more of an opinion I am asking for — don’t you think that maybe a few strategic federally-sponsored raids would suffice to scare off both states and companies in the industry?
Dayton: It would not scare off any states. States are pretty defiant, and it’s totally legal for a state to have its own cannabis laws; there have been Supreme Court rulings that say that the states can have their own cannabis laws.
Now, the federal government can come in and enforce its laws there too, and those two things can exist simultaneously. So, it won’t scare off the states. It will certainly scare off some owners, though. And, that’s fine, because there will be plenty of other owners that are willing to take that risk.
Also, the response from the governments of those states who are getting those tax dollars will be fierce. They would have to spend a lot of political capital to accomplish this. And these are swing states too! So they would also be shooting themselves in the foot for the midterm elections. I mean, Colorado, Nevada … these are swing states.
Hasse: Do you see the Cole Memo is at risk at all in this situation?
Dayton: What Jeff Sessions said most recently was that he largely thinks that the Cole Memo is valid. So, while that he kind of hinted that there might be some slight changes in the Memo, which would make it more stringent, he largely thinks it is good policy.
It’s notable to point out that this is different than what he said when he was a senator. I think the realities of the position and the realities that Trump made a campaign promise on this to respect states’ rights on this has had an impact on him. But there are elements of the Cole Memo that really lay out some pretty strict guidelines that people would need to follow in order to avoid federal prosecution. So, I would think that we might want to look more carefully at that because this is the type of attorney general who might interpret those guidelines very stringently. That is where I think there may be a real risk.
Hasse: But, in general, your view is that all the states that are currently handing out licenses will continue to do so, notwithstanding what the federal government says?
Dayton: By state law they have to keep issuing them … The voters have spoken and these states are going to be issuing these licenses.
It’s important to remember that we’ve made it through Obama going back on his campaign to leave the states alone, and then going back to leaving them alone on this. We made it through John Ashcroft under the George Bush administration going after these folks… Notwithstanding, the industry continues to thrive.
We’re stronger than we’ve ever been. Most importantly, we’re creating jobs and a lot of tax money in states that very much need it. So, it’s really hard to go after that.
Finally, it’s important to note that where these laws have passed, they’re more popular after they’ve passed and been implemented than they were before. That really says something about what good policy this really is.
Hasse: Do you see any particular markets at risk — both as in states and as in recreational versus medical?
Dayton: California is always at risk because the state licensing hasn’t been implemented yet. The same goes for Michigan; states that don’t have state licensing yet are always more at risk I think. But California will be implementing their state licensing starting in January of 2018, so that should resolve that problem there.
Hasse: Do you have any predictions as to which states will legalize or decriminalize cannabis for adult use next?
Dayton: I think Arizona, Rhode Island and Michigan are likely to pass legalization in the next few years.
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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