We’re in cannabis sector earnings season once again. This is a great time of year, because cannabis companies offer guidance on the most important sector-level trends.
Here are two key insights from recent commentary by cannabis company top brass.
2 Key Cannabis Sector Insights
Rescheduling Is Real
The big cannabis sector catalyst on the horizon remains rescheduling. This means moving cannabis to Schedule III from Schedule I under the Controlled Substances Act. The change would boost cannabis sector cash flow by letting companies deduct more expenses against sales.
Ever since President Donald Trump signed an executive order in late December telling his Department of Justice to implement rescheduling, cannabis investors have waited patiently with high hopes. But they are a fickle and emotional crowd, so they routinely give up hope and sell positions.
This is a big mistake. Rescheduling definitely remains on track, several cannabis sector CEOs with political connections confirmed in recent earnings calls.
“When, not if, the final rule becomes effective, which we expect to occur ahead of the midterm elections, it will serve as the foundational catalyst for broader reform,” said Curaleaf (CURLF) CEO Boris Jordan, in his company’s earnings call. He thinks rescheduling will have a knock-on effect that helps the sector. “Momentum from rescheduling will bring us closer to a U.S. exchange up-listing, expanded access to money center institutions, and credit card usage, which will create a fundamentally improved operating and capital markets landscape.”
Charles Bachtell, the CEO at Cresco Labs (CRLBF), is on the same page. “Federal reform momentum is real,” he said in his company’s earnings call. “The rescheduling executive order is hugely consequential, and when implemented, will change the entire industry’s economic landscape.”
These two CEOs aren’t alone. “We applaud the President for fulfilling a campaign promise and expect the administration will follow through in short order,” said Trulieve Cannabis (TCNNF) CEO Kim Rivers in her earnings call. “Importantly, rescheduling signals that long overdue common sense cannabis reform is achievable.”
The bottom line here: If you can’t understand the reality that government moves slowly and at an often-unpredictable pace, you probably should not invest in a sector that depends on government action to succeed. For everyone else, cannabis stocks look like a buy now, ahead of probable rescheduling. No, nobody knows precisely when. Stop asking.
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Destructive Price Deflation May Abate
Right now, an odd federal loophole allows legal sales of products that contain hemp-derived THC. That’ll close this fall. When it does, it’ll take hemp-based THC drinks and edibles off the market. This will reduce the downward pressure on prices that this supply has caused, predicts Jordan at Curaleaf.
“As this loophole closes and consumers migrate back to the regulated dispensary channel, we expect demand to normalize, pricing pressures to abate, and the industry to return to more rational and sustainable pricing environment,” says Jordan, at Curaleaf. He expects this effect to play out in the second half of the year, when the hemp-derived THC product ban kicks in. And no, don’t expect the federal government to reinstate the federal hemp-based THC product loophole. It ain’t gonna happen. “We are hearing there is 0% chance that the Republicans are going to vote for an extension.” Republicans who control the House and Senate have no interest in doing this, he says.
Cresco CEO Bachtell thinks the hemp-based THC product loophole will have a lasting benefit for cannabis companies, because it introduced a lot of consumers to THC use. “Intoxicating hemp has had an impact on several of the main markets that we’re in,” he says. “In the event that that does diminish, we do see that sort of ancillary benefit of a broadened and grown consumer base that now has had the ability and the opportunity to get to understand cannabinoids better. That will naturally, at some capture rate, come over to the regulated licensed cannabis market.”
For the four other key cannabis sector insights from recent earnings calls and the stocks that may benefit the most, consider subscribing to Cabot Cannabis Investor here.
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