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Could COVID-19 Catalyze Marijuana Legalization in the U.S.?

The coronavirus pandemic has wreaked havoc across the world this year. After taking a major hit in March, the S&P 500 has managed to claw its way back into positive percentage growth for the year, now up just 1.66% as of Oct. 30. But in some ways, the global public health crisis seems to have spared the marijuana industry. Marijuana sales soared amid the pandemic both in Canada and the U.S.

Although Canada has struggled with regulatory hold-ups and black market sales, those issues didn't stop sales from breaking records this year. The second quarter marked the first time that legal cannabis sales in the country surpassed illegal sales. Household spending on licit cannabis (recreational and medical) rang in at $803 million, while illicit spending came to $784 million.

Sales numbers are even better in the U.S., where there is a limited legal market for marijuana. Illinois recorded a whopping $431 million in total sales since recreational legalization took effect on Jan. 1. Combined (medical and recreational) sales in the state touched $100 million in September alone. Currently, 33 states and the District of Columbia have legalized medical cannabis, while recreational cannabis use is legal in 11 states and the nation's capital. Federal law still classifies the substance as a Schedule 1 drug, but many individual states' efforts reflect broader public support for decriminalization and legalization. Hopes are high that the drastic surge in U.S. sales during the pandemic could help push lawmakers to legalize marijuana.

Image source: Getty Images.

Have other countries legalized marijuana during the pandemic?

While some Americans eagerly wait for nationwide legal cannabis, many other countries have stepped up this year and elected to "go green." Amid the pandemic, Mexico's high court allowed an extension of a deadline for legislators to review and enact marijuana policy changes. One Mexican Senator discussed how marijuana legalization could bring in "tax revenue to offset economic losses caused by the coronavirus pandemic." The country's senate is expected to vote on a bill to legalize marijuana by the end of this month.

Distressed by the pandemic, Lebanon became the first Arab country to legalize medical cannabis on April 21. Crippled by financial crises amid the pandemic, the Lebanese government hopes that medical marijuana will bring in new revenues and stimulate the country's agricultural sector. Lebanon allows cannabis cultivation for medicinal and industrial purposes, but recreational use is still prohibited.

Hopes are high for legalization in the U.S., and soon

As more countries and new U.S. states legalize marijuana, it will be far easier to invest in cannabis stocks. But federal legalization at home would certainly provide the biggest benefits to fledgling U.S. marijuana companies, including the likes of Illinois-based Cresco Labs (OTC: CRLBF) and Green Thumb Industries (OTC: GTBIF). Both of these businesses already sport triple-digit revenue growth and are hoping that the pandemic turns the government's attention to the benefits of the budding pot industry in America.

Both took advantage of their home state's new recreational cannabis market in 2020. For its second quarter, which ended June 30, Cresco saw a revenue increase of 216% year over year to $94.2 million, and also reported positive EBITDA of $16.4 million, an increase from $2.2 million in Q2 2019. Meanwhile, Green Thumb saw a stunning 167% year-over-year jump in revenue to $119.6 million in its second quarter ended June 30. EBITDA rang in at $35.4 million, up from $2.3 million in the prior-year period.

Image source: Getty Images.

That said, Canadian pot stocks like Canopy Growth (NYSE: CGC) should enjoy newly opened doors if the U.S. legalizes pot. Canopy could launch its innovative derivatives products (vapes, beverages, chocolates, and more) in the U.S. market with the help of its partner and beverage giant Constellation Brands (NYSE: STZ). Moreover, Canopy's strategic acquisition of U.S hemp company Acreage Holdings is set to finalize upon legalization, which will help expand its market opportunity.

Shares of Green Thumb are soaring this year, with gains of nearly 60%, while Cresco Labs is up 2%. Canopy's stock has declined 11%, still better than the industry benchmark Horizons Marijuana Life Sciences ETF's slump of 31%.

GTBIF data by YCharts

Has the pandemic advanced the pot agenda?

There is still a lot of uncertainty around federal legalization. But that hasn't stopped states from taking independent action. The sudden spike in sales amid the pandemic revealed the importance of how much tax revenue a legalized marijuana industry could generate. (Another strong market, California recorded a whopping $208 million in sales in the second quarter.) This has pushed many states to ramp up their legalization efforts despite alongside their immediate attention to the coronavirus crisis. New Jersey, Mississippi, South Dakota, Arizona, and Montana have cannabis legalization proposals on the November ballot.

The pandemic brought in severe losses for many business sectors and will have lasting effects on the American economy as a whole. As the coronavirus crisis drags on, the global legal marijuana (medical and recreational) market, which is poised to grow at a compound annual growth rate (CAGR) of 18.1% to $73.6 billion by 2027, is looking more and more like an attractive market opportunity.

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Sushree Mohanty has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands and Green Thumb Industries. The Motley Fool has a disclosure policy.


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