The legalization of medicinal cannabis in Pennsylvania has gone extremely well up to this point. However, Cantor Fitzgerald analyst Pablo Zuanic said Monday that the state is struggling to agree on a path forward for legalizing recreational cannabis.
Finding The Path Forward: In most states that have legalized recreational cannabis sales, recreational licenses have gone to the incumbent medicinal cannabis retailers. However, Pennsylvania is considering a plan that would instead grant recreational cannabis sales licensed to 600 state-owned licensed liquor stores in the state.
Pennsylvania is set up for a $5 billion budget deficit over the next two years, but recreational cannabis legalization could present a path forward, Zuanic said.
State-owned liquor stores generated $2.5 billion in sales in the last fiscal year. After factoring in between $2 billion and $4 billion in recreational cannabis sales and applying a 2x enterprise value-to-sales multiple, the state could potentially sell its state-owned stores for something in the $10 billion range within a few years, he added.
How To Play It: It is still too early to predict the path or timing of recreational cannabis legalization in Pennsylvania, but recreational legalization in neighboring New Jersey could be a bullish catalyst.
“Gov Wolf recently stated the PA state auditor general has estimated adult-use legalization could bring in as much as $600Mn in annual recurring tax revenue for the state (two smaller states, WA and OR, collected $319Mn and $266Mn in cannabis tax revenue in 2018,” Zuanic said.
Among the stocks Cantor covers, Zuanic said multi-state operator Green Thumb Industries Inc. (OTCQX: GTBIF) current has the most exposure to the Pennsylvania market followed by Cresco Labs Inc. (OTCQX: CRLBF) and Curaleaf Holdings Inc. (OTCQX: CURLF).
Benzinga’s Take: Online prediction market PredictIt suggests Democratic presidential contender Joe Biden has a 64% chance of winning the election, and analysts agree that a Biden victory would be good news for cannabis stocks across the board. Cannabis stock investors can help mitigate risk associated with the volatile industry by buying a basket of Canadian legal producers and U.S. multi-state operators that have high-quality balance sheets and leading market shares.
Latest Ratings for GTBIF
See more from Benzinga
© 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.