Cannabis legalization has taken a back seat in the US. Since the last Democratic debate, there hasn’t been much discussion about federal legalization. However, headwinds don’t seem to end for the cannabis sector this year. News about cannabis corruption in the US highlighted trouble for the upcoming elections. Let’s dig in a little more.
Cannabis license corruption in the US
Recently, President Trump’s impeachment news engulfed the markets. Cannabis license corruption is another concern before the 2020 elections.
Last week, a Leafly report said that the US Attorney for the Southern District of New York unsealed a criminal indictment with ties related to cannabis legalization. The indictment shows that a group of four US citizens tried to use foreign money to influence domestic elections. The group even attempted to elect two Nevada candidates to help get recreational cannabis licenses.
According to the indictment, the defendants didn’t obtain a cannabis license in Nevada. As a result, they tried to influence the candidates making licensing decisions. However, the candidates weren’t aware of the illegal donations. Nevada state candidates Adam Paul Laxalt and Wesley Karl Duncan, both Republicans, were involved in the license corruption.
However, cannabis license corruption isn’t surprising. The cannabis space lacks federal regulations and involvement. Marijuana is still illegal at the federal level. The FBI is investigating corruption in the cannabis space. Public officials might be inclined to accept bribes in exchange for licenses. There aren’t strict and transparent processes to obtain a license.
The FBI discussed the issue on its podcast in August. Supervisory Special Agent Regino Chavez said, “We’ve seen in some states the prices go as high as $500,000 for a license to sell marijuana.”
Trump voters support cannabis legalization
While Democratic candidates support cannabis legalization at the federal level, legalization might take a back seat due to corruption issues before the elections. Many US states are moving forward with legalization. We discussed how Wisconsin, Pennsylvania, Florida, and South Dakota are gearing up for cannabis legalization.
Marijuana legalization has massive support from Americans. As a result, voters are taking matters into their own hands this time. Previously, I discussed how voters in Florida started campaigns to support cannabis legalization.
Recent data show that 67% of voters support adult-use marijuana in Florida. Also, 57% of the voters support President Trump. Fabrizio, Lee & Associates conducted the poll on behalf of the Make It Legal Florida Committee. MedMen (MMEN) is responsible for the campaign.
Notably, the cannabis space corruption and regulatory scandals. Tilray (TLRY) and Hexo (HEXO) might be next on the cannabis scandal radar. Tilray is being investigated for potential securities violations and a breach of fiduciary duty claims. Read Cannabis Scandal Radar: Is Tilray Next? to learn more. Hexo is also being investigated for possibly violating a federal security law.
Trouble in the marijuana space
While the FBI scrutinizing illicit activities in the cannabis space is good, it might delay legalization. However, I think that federal cannabis legalization will help track illegal activities and black market sales. Stricter regulations would keep black market sales to a minimum. For example, Canada legalized marijuana last year. However, thriving black market sales pressure cannabis players’ revenues. Most of the cannabis players missed their revenue guidance and analysts’ estimates in their recent quarter.
Recently, Hexo announced that it would miss its fourth-quarter revenue guidance. The company expects its fourth-quarter net revenues to be approximately $14.5 million–$16.5 million. The company expects its net revenues to be roughly $46.5 million–$48.5 million for the fiscal year. Hexo also withdrew its fiscal 2020 guidance due to regulatory uncertainty across the pan-Canadian system and delayed government approval for cannabis derivative products. Appropriate regulations are necessary for cannabis companies. To learn more, read Hexo Withdraws 2020 Outlook, Stock Falls 24%.
Meanwhile, Aphria (APHA) will likely report net revenues of 134.2 million Canadian dollars for the first quarter of 2020—compared to 13.2 million Canadian dollars in the first quarter of 2019. The company expects to generate net revenues of approximately 650 million Canadian dollars–700 million Canadian dollars for fiscal 2020. Aphria will report its earnings for the first quarter of fiscal 2020 today. Read Aphria Q1 2020 Earnings: What to Expect? to learn more. Canopy Growth (CGC) (WEED) will likely report net revenues of 114.8 million Canadian dollars in the second quarter of 2020. The company will report its results next month.
Marijuana sector trading in the red for now
Many analysts think that the cannabis sector could see lower sales in upcoming quarters. Cannabis 2.0 expansions will not show results until later next year. As a result, analysts reduced their target price for many cannabis stocks. To learn more, read Cannabis Stocks in Trouble, PI Financial Cuts Target Price.
Cannabis stocks have been trading in the red since the Hexo disaster last week. The lower performance continued this week. Hexo fell 6.7% on Monday, while Tilray fell 1.4%. Canopy Growth and Aurora Cannabis stock (ACB) fell 2.9% and 4.6%, while Cronos Group (CRON) stock rose 0.25%. The Horizons Marijuana Life Sciences ETF (HMMJ) fell 1.3% on Monday.
Marijuana legalization by the 2020 elections could help change the industry’s structure. Marijuana companies could expand fully in the US.
What do we think?
I can’t stress enough that federal marijuana legalization is vital. Although black market sales and illicit activities won’t disappear completely, it can be kept in check. The FBI’s investigation into cannabis corruption and the FDA’s scrutiny about vaping concerns are still headwinds for the sector. All of these issues could put pressure on President Trump and his re-election campaign. US Attorney Geoffrey Berman said, “The American people expect and deserve an election process that has not been corrupted by foreign influence.”
For more cannabis-related news and updates, visit 420 Investor Daily.