How cannabis stocks can win big with new policy changes

Cannabis legalization has been an issue on many ballots in the past decade, with several states opening up to recreational use legalization. US Vice President Kamala Harris called on the federal government to move "as quickly as possible" in terms of reclassifying cannabis from its current Schedule I classification. If any efforts are successful in doing so, what would the cannabis market look like and who would stand to benefit the most?

Poseidon Co-Founder & Managing Partner Emily Paxhia joins Market Domination to give insight into potential new legislation around cannabis and what investors and consumers alike can expect moving forward.

Paxhia outlines the current efforts to change cannabis legislation in the US: "Importantly with cannabis legalization, we have several efforts running down the field. There is the rescheduling efforts, and we are hoping to see something come out of that soon. There's also the continued and loud discussions around banking reform in the legislative branch but we've also introduced a path through the judicial branch working with Boies Schiller Flexner [LLP] to challenge the 2004-2005 case on Raich Vs Gonzales which about the Commerce Clause."

She continues by affirming: "Interestingly things that are catalytic that change the volume of capital flowing into the industry are very top down. We hear from investors that are paying attention to these federal reform signals, but what we are also really interested in is the state-to-state catalysts that really actually open up the markets and improve the business fundamentals."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video transcript

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JULIE HYMAN: Now for some names that often top our Yahoo Finance trending ticker page, cannabis stocks. Rumors of regulatory reform have fueled volatility over the past few months. But without meaningful legislation is the sector better left alone or are there opportunities for meaningful growth. We're looking at how to navigate the big picture with the Yahoo Finance playbook. And joining us is Emily Paxhia, poseidon co-founder and managing partner and a long time investor in the cannabis space. Emily, it's great to see you.

EMILY PAXHIA: Great to see you too. Thanks for having me.

JULIE HYMAN: So let's get to the regulatory elephant in the room, if you will, first of all, because there had been talk potentially that there might be a rescheduling of cannabis that could be an inching in the legalization direction on the federal level. What are you hearing on that front? And is that going to be a potential catalyst?

EMILY PAXHIA: So what we've heard so far and what we've read from the published HHS recommendation, I believe it's about 52 pages, is that. It got a very strong endorsement for rescheduling to Schedule III from Schedule 1 from the HHS. And it is now in the hands of the DEA. The DEA process is not something that we have access to or that really anyone has access to as far as I can ascertain from speaking with many consultants and analysts.

They're going to work through their process and come out with their decision in their own due time. The DEA can take time on this. But we do understand that the Biden administration is really calling for reform on this issue as it's very clear that cannabis no longer should be sitting on a Schedule 1 which basically designates it as not having any benefit whatsoever. And the HHS said very clearly that cannabis has more benefit than it does harm.

And in fact, actually is better off in society than something like alcohol. So when we think about these two analog industries, it's something we're really interested in seeing where it's going to land. But we don't know the timing and we don't know exactly how the DEA will land on this issue.

JULIE HYMAN: Well, Emily, that's exactly what I was curious about is any more information we might have about the timing which continues to be this wait and see hope for something and then the hopes get dashed every time. But if we don't have the information about the timing, I wonder what you can tell us about the political will for pushing this. Particularly given that we are in an election year, you mentioned your sources with the Biden administration. Does the election backdrop here, have an impact on this?

EMILY PAXHIA: Absolutely, Cannabis is one of the only issues that polls so universally well across both sides of the aisle actually when it comes to the constituents. Right now we're standing per the Gallup poll at above 70% approval rating for legalizing cannabis, especially a blend of medical and adult use. So when you're thinking about getting voters to the poll and that number really gets even better when you're talking about younger voters.

You could see how this turned out actually in the Ohio ballot initiative where I believe it came in at about 57% approval to get their legal adult use market, which should open by June of this year. Even when it goes to the later skews, it was still 50/50 in our country to have anything that's pulling at 50/50 is truly almost the form of the best alignment we can see. So we know the politicians will be paying attention to this going into November.

Importantly, with cannabis legalization, we have several efforts running down the field. There is the rescheduling efforts and we're hoping to see something come out of that soon. There's also the continued and loud discussions around banking reform and the legislative branch. But we've also introduced a path through the judicial branch working with Boies Schiller Flexner to challenge the 2004, 2005 case on Reich versus Gonzalez which is about the Commerce Clause.

The outcome of that case could be very important as it basically would say that the Controlled Substance Act is overreaching into companies that are running legally and recognized as legal interstate commerce. This case was brought in the state of Massachusetts. So the industry is taking many efforts to try to change the way this is viewed at the federal level. Interestingly, things that are catalytic that change the volume of capital flowing into the industry are very top down.

We hear from investors that they're paying attention to these federal reform signals. But what we're also really interested in is the state to state catalyst that really actually open up the markets and improve the business fundamentals. So up next we've got Ohio.

JULIE HYMAN: So Emily, put all this together for us. Where in terms of the publicly traded companies are you seeing the best opportunities right now?

EMILY PAXHIA: So we're always-- we've always-- we've been in this industry for 10 years investing plus actually. And so we've always been really long focused, fundamental focused. And right now the way that we feel the safest, that's our Banking Act that never gets through is to allocate into companies that we see having offering longevity. And so we look at balance sheets, we look at their SGNA containment. We look at their gross margins and the way that they think about capital allocation on CapEx.

So companies that we like for that are things like GTI, green thumb industries, verano, we like terrascend. We also like ascend wellness holdings. And some of these companies do have some work to do in terms of cleaning up some prior debt that they have restructuring that to make it more favorable and giving them more time. But we do have faith in these teams as they've been at this a while and things like this don't surprise them.

They go into this knowing what they have to do preemptively. And so there are a couple of names that we are focused on for those quality aspects. We also really do look at the assets that they have in the portfolio and how that can unlock growth. And so certain companies like ascend, terrascend, GTI, who have significant exposure in Ohio or air is another one. In Ohio, those are companies who should see the benefit of those states turning on in the near term.