CIBC: Bet on this pot stock as America rethinks its cannabis laws

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Democratic U.S. presidential candidate and former Vice President Joe Biden is seen at War Memorial Plaza during Memorial Day, amid the outbreak of the coronavirus disease (COVID-19), in New Castle, Delaware, U.S. May 25, 2020. REUTERS/Carlos Barria     TPX IMAGES OF THE DAY
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A cannabis policy shift in the United States is looking increasingly likely as Joe Biden’s popularity climbs ahead of the November presidential election, according to CIBC. An analyst at the bank predicts Toronto-based Cronos Group (CRON.TO)(CRON) is best-positioned among Canadian firms to expand south of the border under friendlier rules for pot.

In a research note on Friday, John Zamparo pointed to a poll by The Economist showing the former vice president’s odds of becoming America’s 46th president have climbed above 90 per cent.

Recently released policy recommendations ahead of the Democratic National Convention suggest party support for the STATES Act, which would essentially delegate the question of cannabis legality to individual states.

While new leadership in the Oval Office may not be enough to spur meaningful near-term reforms for America’s cannabis industry, Zamparo also predicts the Democrats will gain the upper hand in the Senate, clearing a path for cannabis policy proposals.

He sees Cronos Group, Canopy Growth (WEED.TO)(CGC), Aphria (APHA.TO)(APHA) and Canopy Rivers (RIV.TO) as the biggest beneficiaries among the Canadian players, in that order.

“[Cronos Group is] best-positioned given [its] relatively low cash burn rate and relationships with U.S. cannabis retailers via connection to Gotham Green, [a] U.S.-based cannabis investment firm co-founded by CRON CEO Mike Gorenstein,” Zamparo wrote.

“Of course, we believe these stocks would see significant expansion during the run-up to legislation passing, similar to how Canada’s legalization played out.”

Canopy Growth is guaranteed to enter the massive U.S. cannabis market through its obligation to buy multi-state pot firm Acreage Holding (ACRG-U.CN) if cannabis sales become permissible at the federal level. Canopy CEO David Klein told Yahoo Finance Canada last month that he expects the U.S. market to open up in 2022, regardless of who is in the White House. He later added that a $60 billion total addressable market for pot in the U.S. is expected after the changes.

Zamparo notes Cronos has not spent as aggressively as a number of its peers on building out Canadian operations, and is therefore better-positioned to bankroll U.S. expansion. A number of Canadian pot producers, including Canopy, are reducing their domestic cultivation footprints to adjust to a smaller-than-expected market.

Cronos said it had about $1.1 billion in cash and equivalents as of March 31. Canopy Growth said it had about $2 billion after its latest quarter. Aphria reported about $515 million as of Feb. 29. Canopy Rivers, a venture capital firm, said it had about $47 million at the end of March.

“All four have strong balance sheets with capital to invest, while also communicating that, under the right legal conditions, America would be a target for their M&A prospects,” Zamparo wrote.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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