Canadian pot stocks under pressure despite 'green wave' of U.S. legalization

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Shares of major Canadian cannabis companies traded in negative territory on Wednesday amid election results showing an uncertain pathway for the U.S. to legalize cannabis federally despite a "green wave" of state-led ballot initiatives that legalized marijuana in five U.S. states. 

While votes are still being counted the day after the U.S. election, voters in Arizona, New Jersey, South Dakota, Mississippi and Montana all gave the green light to legalizing cannabis for either medical or recreational purposes. 

The lack of clarity on federal legalization will likely place Canadian cannabis companies with ambitions of entering the lucrative U.S. market on ice for the time being. Companies like Canopy Growth Corp., Cronos Group Inc., and Aurora Cannabis Inc. have some U.S. cannabis exposure with sales of CBD products permitted, but companies are prohibited from selling products containing high levels of THC. 

"Federal permissibility is key for Canadian cannabis stocks to benefit, and that may be unlikely with a Republican Senate, so we do not see an upside trade for Canadian stocks from the election," said Cantor Fitzgerald & Co. analyst Pablo Zuanic in a research note to clients. 

Once the state elections are finalized, analysts expect state legislatures to begin planning how to sell cannabis legally, with Arizona and New Jersey expected to be the first to launch sales early next year. 

The results would see 35 U.S. states legalize cannabis for medicinal purposes, while 15 of them permit recreational sales of marijuana. 

Harvest Health & Recreation Inc. Chief Executive Officer Steve White said that when he found out late Tuesday that Arizona would legalize adult-use cannabis sales, he took a deep breath and "thanked God that this one didn't go the wrong way." 

"I don't say this often, but I made a guarantee to my organization that Arizona would pass cannabis reform in 2020," White told BNN Bloomberg in a phone interview. "This is a really big deal for us." 

TerrAscend Corp. Chairman Jason Wild told BNN Bloomberg that he shared "silly emojis" with some of his executive team when he learned New Jersey legalized recreational cannabis sales. With the Garden State green lighting cannabis sales, he says he expects neighbouring states such as Pennsylvania and New York to introduce similar changes soon. 

"There's going to be a domino effect now in the U.S. northeast," Wild said in a phone interview. 

While full federal cannabis legalization may not happen immediately, Tuesday's election results signal that it's likely an inevitability in the next four years, White added. 

"If you're relying on the federal government to do anything for the U.S. marijuana market, you're going to be in a bad place," he said. 

Having federal legalization on hold may also stymie efforts for cannabis-related social and civil reform initiatives to be launched. Those initiatives, for now, will have to be funded on the state level, said Cresco Labs Inc. Chief Executive Officer Charlie Bachtell. 

"Cannabis itself showed over the past four years that it can be this real industry that now has political support behind it, and it can be key toward social reform and inequity. But it's also this economic rocket ship that continues to have one hand tied behind its back," Bachtell said in a phone interview. ​

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