Amid a highly divisive election season, cannabis was something voters could agree on.

Voters in all five states with cannabis-related initiatives on the ballot approved those measures by wide margins, representing a clean sweep for the industry — and significant upside for the U.S.-focused cannabis companies, especially those with operations in markets that will soon open to adult-use like New Jersey and Arizona.

"I would suggest we are the biggest winner, full stop," said Curaleaf CEO Joe Lusardi. "And the beauty of Curaleaf is, not only that we are the number one in New Jersey, but we're on every side of the border, right? We've got a huge presence in New York, Pennsylvania, Connecticut, so I think we're going to continue to win with a knock-on effect from New Jersey."

Stocks Soar

U.S. cannabis stocks, which typically trade over the counter in the U.S. or on alternative Canadian exchanges like the Canadian Securities Exchange or NEO, shot up after voters in Arizona, Montana, New Jersey, and South Dakota approved adult-use cannabis; and voters in Mississippi and South Dakota voted in favor of medical cannabis Tuesday evening.

One of the largest U.S. operators, Massachusetts-based Curaleaf, has operations in Arizona and New Jersey and closed up 3.6 percent on the OTC on Thursday. Green Thumb Industries, which operates in New Jersey, closed up 5 percent. Cresco Labs and Harvest Health and Recreation, which have operations in Arizona, closed up 4.6 percent and 6.9 percent, respectively.

Stifel analyst Andrew Carter, who covers several Canadian cannabis companies that trade in the U.S., acknowledged that Curaleaf stood to gain after Tuesday's results.

"You can make the argument for Curaleaf being a big winner [Tuesday]. Although it was expected, they have a big position in Arizona, they have a big position in New Jersey. but regarding New Jersey, so does — Green Thumb has an initial piece there — so does TerrAscend," Carter said.

Eyes on New Jersey

The cannabis industry was most excited about New Jersey, where 67 percent of voters on Tuesday approved amending the state constitution to legalize adult use cannabis, according to the Associated Press.

Experts believe that legalization in New Jersey will galvanize surrounding states like New York, Pennsylvania, and Connecticut, which currently only have medical marijuana, to follow suit. Cannabis attorney Jessica Gonzalez, who worked on the campaign to pass legalization called NJ CAN 2020, told Cheddar that New Jersey, with its population of close to nine million, will have a robust adult-use market of its own. Once surrounding states see the $300 million in tax revenue that New Jersey Policy Perspective projects it will generate within its first year of legalization, they won't much like knowing their potential tax dollars are skipping across the border into another state's coffers. 

"I think really the pandemic has put [legalization] at the forefront, where it's no longer just something, 'Maybe we can do this,' but it's now becoming something that we probably have to do," said Gonzalez. "Cannabis legalization is a new avenue of money, it's not, you know, you're taking money from somewhere and putting it somewhere else. It's a completely new avenue of revenue."

Lusardi said that Curaleaf, which also has operations in New York and Pennsylvania, stands to benefit immediately, as well as down the line from New Jersey's adult-use market.

"You have a major, major population center right in the Mid-Atlantic that is led by a pro-cannabis governor, pro-cannabis legislature, on the border of New York. [It] really sets up to knock the dominoes down," said Curaleaf's Lusardi. "I really think New Jersey is maybe the single biggest catalyst we've seen for cannabis in a long time. It's that significant."

Chicago-based Cresco Labs does not currently operate in New Jersey, but does have a footprint in the surrounding states of New York, Pennsylvania, and Massachusetts. CEO and founder Charlie Bachtell said his company is not rushing to get into the New Jersey market.

"I don't know that that means we need to get into New Jersey. I do think that the halo, the ripple effect of the New Jersey law will have such a material impact on states that we're already in right next door," Bachtell said.

Some, like New York State Senator Liz Krueger, still cling to hope that the Empire State could beat out New Jersey when it comes to getting an adult-use program up and running.

"I'm going to cheer on New Jersey," Krueger told the New York Times, "and hope that it helps us beat them to the punch."

New Player in the Southwest

Arizona's race was another that excited the industry. Some 60 percent of voters in the Grand Canyon State approved adult-use cannabis on Tuesday, according to the Associated Press, despite a similar measure failing during the 2016 election. According to Marijuana Business Daily, Arizona's medical market was the largest in the country in 2019, and the adult-use market has potential to clock $400 million in revenue within its first year.

Dan Pabon, general counsel and chief government affairs officer at Colorado cannabis company Schwazze, said Arizona's move spells good things for cannabis in states like New Mexico and Utah.

"Colorado is no longer alone in the recreational marijuana space in the Southwest. But it also, I think, signals probably a good sign that states like New Mexico are likely to take up the issue … next year to legalize cannabis," Pabon said. "The Southwest is a pretty fertile area for both consumer and patient use."

Red States Go Green

South Dakota made history on Tuesday after voters approved both Initiated Measure 26 and Constitutional Amendment A, which meant legalizing adult-use and medical cannabis at the same time. Eric Berlin, a cannabis lawyer at Dentons, said legalization in South Dakota would represent a clear message from voters, considering Gov. Kristi Noem has been a vocal opponent of cannabis.

Montana voters also approved adult-use cannabis in spite of tight polling that led investment bank Cowen to issue the state a "C" rating in terms of likelihood of passing. 

Finally, Mississippi voters overwhelmingly approved volunteer-backed medical marijuana Initiative 65. Experts, like Berlin, had questioned whether the initiative would pass after the state legislature put an alternative measure on the ballot that sounded very similar, but was substantially more limited. Advocates alleged the alternative Initiative Measure 65A was an attempt by the legislature to derail legalization altogether.

Montana, Mississippi, and South Dakota may not have very large potential markets, but Schwazze's Pabon said their approval sends a clear message to Congress that cannabis is a bipartisan issue, viable in historically red states.

"With places like Montana, South Dakota, Mississippi, you now have a canary in the coal mine with the passage of these measures. And so the hope is that the senators or members of the House of Representatives see that the plan is a viable one for their state, and that, you know, they can then support that at a federal level," he said. 

In spite of major wins on the state level in the U.S., not everything went according to plan for cannabis. The "blue wave" expected to flip the Senate to Democratic control likely won't materialize, meaning even if former Vice President Joe Biden wins the presidency, federal cannabis reform could prove difficult in a Senate controlled by cannabis opponent Sen. Mitch McConnell (R-Ky.).

"All the key Republican seats that were in question look to be staying Republican, and if you keep the Senate in the hands of the Republicans, I don't think the cannabis reform — at least the cannabis reform the Canadian LPs need — has any prospect of success in the Senate," said Stifel's Carter.

On Wednesday following election night, major Canadian cannabis stocks including Canopy Growth, Aurora Cannabis, Tilray, and Cronos Group closed down more than 7 percent each. But on Thursday, they were back to making double-digit gains.

For U.S.-focused companies, Carter said leaving cannabis federally illegal — or maintaining the status quo — could actually be interpreted as a benefit. So long as cannabis is federally illegal, Canadian companies that trade on major U.S. exchanges can't step over the border and pose a competitive threat, and consumer packaged goods giants can't buy up multistate operators. 

"I think that's the biggest thing driving the positives on these guys is that extended window that they get of creating their position in the U.S. and capturing growth in this category," Carter said.

Cresco's Bachtell agreed, adding that Cresco is very particular about choosing challenging markets with sufficient regulation that allow its particular set of skills to shine. That strategy can also be applied to the broader U.S. market, as well, he said.

"This remains a kind of patchwork regulatory framework across the country that's a challenging environment for a company to create scale … and we've proven ourselves to be one of the very few companies that figured out kind of how to do that," Bachtell said. "The complexity creates challenges to allowing anybody to do this. And when we see challenges, we as an organization, look at those as opportunities."

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