A top Wall Street analyst lays out how New Jersey could create a 'domino effect' of cannabis legalization across the Northeast and shares the 5 stocks that will benefit the most

Voters in four states will get to decide whether to legalize recreational cannabis in November, and investors should have their eye on one state in particular.

That state is New Jersey, according to Cowen's Viven Azer. If New Jersey votes in favor of legal cannabis, that could lead to broader legalization across the Northeastern US as a whole, she wrote in a recent note to investors. Companies that have laid out groundwork in the region are well positioned to reap the rewards.

Arizona, Montana, and South Dakota, will also vote on whether to legalize adult-use cannabis in November. Azer has said New Jersey and Arizona are most likely to legalize. While much of the West Coast has already legalized cannabis, the same isn't true of New Jersey's neighbors, which include some of the most populous US states.

Analysts have long predicted that if one of the main states in the Northeast legalizes cannabis, the others would soon follow. Azer said New Jersey legalization and state budget pressures related to the coronavirus pandemic could create a "domino effect" that would accelerate cannabis legalization in the region.

Governors in Connecticut, New Jersey, Pennsylvania, and Rhode Island have said in the past that when the time comes, they want to lay out a collaborative regional approach to cannabis. Though all four states have medical programs, and most have decriminalized possession of the drug, recreational cannabis is not currently legal in any of them.

Cowen predicts that if the domino effect does occur, the total US cannabis market could gain a $6 billion boost in 2025.

New York's adult population alone is greater than every state with ballot referendums combined, said Azer, while Pennsylvania's population is 1.5 times that of New Jersey's. New Jersey's population is double that of Arizona, the state second most likely to legalize this November, according to Cowen. 

Multi-state operators Curaleaf, Green Thumb Industries, Acreage Holdings, Cresco Labs, and MedMen, all of which have operations in the Northeast, are well-positioned for when the domino effect occurs, said Azer.

Read more: Adult-use marijuana is on the ballot in 4 states, and a top Wall Street analyst lays out which cannabis stocks could get the biggest boost from legalization

Curaleaf's broad geographic reach is would position the company as the biggest financial beneficiary of the bunch, because of its operations in New York, Pennsylvania, and Connecticut. According to Azer, the company could see an additional $439 million in revenue in 2023.

Green Thumb Industries, which also operates in the same three states, is predicted to also gain from a potential domino effect, with an additional possible $330 million in revenue by 2023. Cresco Labs, Acreage, and MedMen also stand to see hundreds of millions of dollars in gains, said Azer, though MedMen's operational challenges pose problems for the company.

Of New Jersey's neighboring states, Eric Assaraf of Cowen Washington Research Group gave New York an A rating outlook for legalization in the coming years, pending the outcome of New Jersey's November vote.

"The state appeared on the cusp of approving an adult- use bill before the pandemic hit," Assaraf wrote.

Connecticut and Rhode Island were given B ratings, while Pennsylvania — which has a Democratic governor pushing for legalization but a Republican-controlled state legislature — was given a C rating.

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