It’s time to buy stocks more aggressively.
That’s the case for stocks in general, but also cannabis stocks. Most cannabis companies aren’t really affected by tariffs. But their stocks have been hit recently by the shift to “risk-off” mode among investors.
As the tariff issue gets resolved, investors will transition back to “risk-on” mode, which will help more speculative sectors like cannabis.
Here are seven reasons why investors will shift to risk-on mode, in my view.
1. Stock investors recently hit panic mode. The VIX fear gauge spiked to over 50. That’s a rare level only seen during very troubling times like the Great Financial Crisis. There have also been several magazine cover indicators, or instances of media that don’t normally cover the markets prominently featuring news about the selloff. This is another sign of extreme negative sentiment. Normally, when sentiment hits extreme negativity like this, it is a time to buy.
2. Valuations look a lot better. The S&P 500 trailing price/earnings ratio has fallen to 20 from 26. The Nasdaq 100 Index p/e is down to 26 from 35. These are levels last seen early in the bull market during September 2023. “This emotional stock market collapse has already greatly improved the valuation profile in just a few weeks,” says Jim Paulsen, an economist and strategist who writes Paulsen Perspectives on Substack.
3. Even without Fed easing, economic stimulus is kicking in. The 10-year rate has fallen to the low 4% range. Oil, commodity prices and the dollar have fallen sharply. A growing liquidity preference among investors and companies will create money supply growth. All these changes will help dampen any slowdown and avert recession, believes Paulsen. He also thinks financial strength among consumers and companies will help avert a recession. The typical balance sheet vulnerabilities that contribute to recessions are absent. As growth slows, fiscal stimulus can ramp up in the form of increased government benefits payments.
4. David Giroux, who manages the outperforming T. Rowe Price Capital Appreciation fund (PRWCX), tells me that proprietary internal models suggest support will be found when the S&P 500 hits 4,900. We are there. This is an attractive buy level, according to their models, as long as you have a medium-term time horizon.
5. So far, this crisis is not linked to systemic problems like irresponsible lending or excessive debt. Instead, it is self-induced. That means it can be easily reversed. Severe market declines around the globe are putting pressure on all governments to come to some sort of compromise on tariffs. “One can argue that unless the endgame of policymakers is global recession, negotiations are likely and could be positive catalysts for markets,” say strategists at Bank of America. “But leadership caving to the US would be impolitic, and negotiations that can be cast as win-wins may be hard to get done quickly.”
6. Ed Yardeni of Yardeni Research notes that at least one lawsuit now challenges President Trump’s authority to cite a national emergency to impose tariffs by executive order. At the very least, a temporary restraining order against tariffs is possible while the issue gets kicked up to higher courts.
7. Polls showing voter displeasure with Trump policies could raise concerns among conservatives about losing Congress in the midterms. This might pressure Trump to find a way out on tariffs.
The bottom line: This is now more of a time to buy than sell. Sentiment recently hit extreme negative levels. Yet the potential for negotiated compromise on tariffs remains. I recently highlighted several cannabis lenders that have been hit hard in the current selloff, even though they seem to have adequate real estate collateral against their loans, and spending on products like cannabis, alcohol and cigarettes tends to hold up fairly well in slowdowns.
A Closer Look at Our Cannabis Lenders
Given that the odds of recession have risen considerably, it makes sense to take a closer look at the financial strength of the cannabis lenders in my Cannabis Plus Insider Portfolio. The portfolio highlights companies that have exposure to cannabis but don’t touch the plant, especially where insiders are buying shares.
Lenders often fare poorly in economic downturns, as bad debt rises. I do not think that will be the case for our cannabis lenders. They face two types of risks over the next year, but they seem manageable.
1. Bad debt risk
The risk of recession has risen quite a bit recently due to tariff-related uncertainties and the potential impact of these uncertainties on consumer spending and company investment decisions.
If a recession or a severe slowdown do hit, my guess is the cannabis sector will be affected less than other sectors. That’s because core cannabis customers tend to be regular users who are unlikely to cut back on consumption. Cannabis spending does not represent a huge part of their personal budgets. And whether you like it or not, spending on “vice” products like cannabis, alcohol and cigarettes tends to generally hold up during hard economic times.
“The medical cannabis market behaves like the pharmaceutical market, and the recreational cannabis market behaves like the tobacco and alcohol markets, both exhibiting low correlations with traditional markets,” our portfolio name Chicago Atlantic BDC (LIEN) says in a filing.
Here’s another factor that helps our specialized cannabis lenders. Regular banks generally don’t lend to companies in the cannabis industry. The reduced competition means our specialized cannabis lenders have their choice of attractive assets to use as collateral. They can command lender-friendly covenants. And they can book loans at higher interest rates.
2. Interest rate risk
A significant portion of the loan books of our cannabis lenders are floating rate. At our Chicago Atlantic Real Estate Finance (REFI), for example, 62% of the loan book has variable interest rates.
Thus, a risk today is that reported earnings will drop if interest rates fall. Loan deals have interest rate floors, which offer some protection against declining interest rates.
But risks remain. Chicago Atlantic Real Estate Finance, for example, reported a 2.7% decline in net interest income to $14.1 million for the fourth quarter, linked in part to the 50-basis-point decrease in the prime rate. The timing of loan proceeds was also a factor. We don’t know the weight of each factor in the mix here.
Interest rates could fall more either because the market moves yields down on benchmark government debt like the ten-year bond, or the Fed cuts the federal funds rate. Either could happen because of a recession or a severe slowdown, or fears about these outcomes.
As things stand now, Fed Chair Jerome Powell seems dead set against cutting the fed funds rate. He still sees inflation as more of a risk than recession. That could change if ongoing tariff uncertainties weigh on consumer spending and company investment decisions, creating economic weakness.
My guess is that the tariff mess gets resolved fairly soon, and we dodge a recession. The big move down in stock markets around the world has put a lot of pressure on policy makers to do deals, including U.S. officials.
Currently, when recession fears ease because of apparent progress in tariff negotiations, the ten-year rate settles in the low 4% range. This suggests to me that the ten-year benchmark rate will stay in the low- to mid-4% range, as long as recession seems off the table. That’s not a sharp enough decline from the high-4% range to hurt cannabis lenders.
Big picture, on the bright side for our cannabis lenders, a Whitney Economics study recently concluded the U.S. cannabis industry will need $66 billion to $131 billion in capital to support new businesses and refinancing over the next decade. That’s a lot of demand for the services of our cannabis lenders.
Here is more detail on our cannabis lenders.
Advanced Flower Capital (AFCG)
Since March 14, insiders at our cannabis lending company Advanced Flower Capital have purchased around $920,000 worth of stock. Buyers included the CEO, a director who is also an officer, and the president. They bought at 6.15 to 6.52.
That’s a good signal for the size, and because it is a cluster buy.
In the current market rout, the stock has fallen under 5. It looks like a buy in the pullback.
Advanced Flower Capital was weak ahead of the insider buying because the company had to cut its dividend to 23 cents a quarter from 33 cents. That happened March 13, a day before insiders bought. Dividend cuts do not go over well with investors, who take them as a sign of trouble. Insiders were buying the pullback the dividend cut created.
Advanced Flower Group is dealing with at least two dubious loans. It is working on negotiating payments. The loans are secured by assets like stores and grow facilities, which, in theory, it could take over and sell, depending on how things work out. The bottom line here is that there’s a good chance the company will recover a lot of the money and redeploy it. That would boost shares. The company currently does not get credit for the capital tied up in the now-dubious loans.
“We continue to see interesting opportunities in the cannabis space as the demand for capital far exceeds the supply,” said Chief Investment Officer and President Robyn Tannenbaum in the March earnings call. As of March 1, the company had an “active” deal pipeline of over $380 million.
Importantly, the new, lower AFC dividend was based on the current performing asset base. It does not incorporate any of the estimated profits that could be earned from redeployment of funds recovered from the troubled borrowers. “We believe that as we begin to get repaid on some of these underperforming assets and reinvest that capital into performing credits, we may unlock future earnings potential,” said Tannenbaum.
In short, there’s a potential catalyst spring-loaded inside the company.
Advanced Flower Capital has a decent record of recovering funds when lending goes wrong, because of the collateral backing the loans. “While past performance is not indicative of future results, we are no stranger to portfolio management and will act aggressively to protect our shareholders’ capital,” said CEO Daniel Neville. “We are laser-focused on unlocking value from underperforming loans and are excited about the new lending opportunities that we are seeing.”
“We see a growing supply-demand imbalance for debt capital across the sector with rising demand outpacing an already limited supply,” said Neville. “This demand is driven by refinancing activity, adult-use and medical expansions, and increased M&A in the cannabis space. Given the Republican sweep and stalled progress on federal reform, we don’t see many new capital providers entering the market, providing AFC with an opportunity to continue lending to strong operators at attractive risk-adjusted returns.”
As of early March, AFC’s loan portfolio consisted of $368.8 million of principal outstanding across 17 loans. The weighted average portfolio yield to maturity was approximately 18%. Reserves against underperforming loans stood at $30.6 million or nearly 10% of loans.
The key takeaway: The very solid insider buying at this company, plus the spring-loaded nature of potential profits from the deployment of capital freed up from bad loans as they get worked out, makes this stock attractive in my view.
Chicago Atlantic Real Estate Finance (REFI)
Chicago Atlantic Real Estate Finance seems to be on a more financially sound footing than Advanced Flower Capital (AFCG).
* Chicago Atlantic reaffirmed its $0.47 per share dividend on March 17, whereas Advanced Flower cut its dividend by 30% on March 13.
* Chicago Atlantic’s bad loan reserve was just $4.3 million at the end of last year or 1.1% of its loan book, compared to $30 million at AFC, which was nearly 10% of its loan book.
* Chicago Atlantic’s real estate coverage ratio is 1.1. Real estate is a solid asset to use as collateral. But loans are also secured against other forms of collateral in addition to real estate, which increases to credit quality.
* Its debt service coverage ratio is 5.5:1 compared with the required 1.35:1.
* In making lending decisions, the company assumes no progress on 280E tax relief that would come from rescheduling cannabis. It also considers unpaid 280E taxes as a form of debt, factored into assessments of borrowers’ financial strength.
* The company has a book value of $14.83 per share, compared to a stock price of about $13.50.
Chicago Atlantic Real Estate Finance says it has a pipeline of potential deals worth about $490 million. As of the end of last year, its loan portfolio principal was $410 million across 30 portfolio companies with a weighted average yield to maturity of 17.2%.
The company is dealing with one potentially bad loan in Pennsylvania, but it seems manageable. “We hope that through operational and balance sheet restructuring, we may restore this loan to accrual status this year,” said CEO Peter Sack in the most recent earnings call. “Defaults, workouts and restructurings are an inevitable byproduct of direct lending. It is an area in which despite a low default rate, we have considerable expertise, and we hope to show definitively in 2025 that we can execute for the benefit of our shareholders.”
The key takeaway: Chicago Atlantic’s good track record so far on avoiding dud loans, plus the fact that its shares are trading below book value, make the stock look attractive at current levels in my view.
Chicago Atlantic BDC (LIEN)
This company is similar to our Chicago Atlantic Real Estate Finance (REFI). But it has two differences.
1. It is a business development company (BDC) as opposed to a real estate investment trust (REIT).
BDCs have more restrictions on customer concentration and the number of public companies they can invest in that have market caps above $250 million. They were established to support lending to small and medium-sized private companies.
For shareholders, REITs and BDCs are treated differently at tax time.
2. About 77% of its loan book is in the cannabis sector. The rest is in the finance, insurance, retail health care, real estate and rental sectors, among others.
Chicago Atlantic BDC appears financially sound.
* It recently declared a fourth-quarter dividend of $0.34 per share, a 36% increase from $0.25 per share the prior quarter. Raising dividends can be a sign of confidence. But in this case, the increase was largely because the company bought a cannabis loan book from its sister company, Chicago Atlantic Real Estate Finance. Chicago Atlantic Real Estate Finance CEO Peter Sack is also the CEO here.
* Chicago Atlantic BDC has almost no exposure to second lien subordinated debt or equity, compared to the BDC average of 19%.
* It had no leverage at year end and no bad debt, compared to a BDC average of leverage of 1.1 times cash flow, and 3.9% portfolio bad debt.
* About 80% of its portfolio is floating rate debt, but 99% of these loans have a rate floor, which shields it from sharply declining interest rates.
The company’s investment portfolio has about $275 million in loans across 28 portfolio companies. The weighted average yield on debt investments is 16.5%, compared with the BDC average of 12.1%
The company says it has a pipeline of nearly $644 million worth of potential deals. It recently closed on a $100 million credit facility.
The key takeaway: Chicago Atlantic BDC appears reasonably sound. So, in my view, it looks attractive here at about 11 per share, which is significantly below its net asset value of $13.20 as of the end of last year.
Cannabis News from Around the World
Part of my core thesis for being bullish on cannabis stocks is that there continues to be tremendous cultural momentum toward cannabis reform around the world. I’m convinced institutional investors will not ignore cannabis stocks forever.
We see evidence of this powerful cultural momentum in the changes in laws to legalize cannabis, big tobacco investments in the space, robust cannabis sales growth in states that legalize, increased cultural acceptance in the form of relaxed drug testing standards in sports leagues and the workplace, and poll results that show a growing majority of people support legalization regardless of age and party affiliation.
These trends tell us cannabis stocks are a strong contrarian buy that will turn very profitable for patient investors with a medium-term horizon. The sector is so volatile, it is easy to get shaken out of names by heightened emotional reaction to drawdowns. So, it is important to catalogue evidence of this cultural momentum. That is the purpose of this section of Cabot Cannabis Investor.
National News
* Former Rep. Matt Gaetz (R-FL) says cannabis reform is on the horizon. President Donald Trump’s first pick for attorney general says in a Tampa Bay Times opinion piece that he’s confident Trump will move cannabis to Schedule III to Schedule I under the Controlled Substances Act (CSA).
“There is meaningful change finally on the horizon, thanks to President Donald Trump and his leadership in supporting the rescheduling of cannabis from a Schedule I drug to a Schedule III drug,” wrote Gaetz. “For too long, cannabis has been classified alongside heroin and LSD, substances with no accepted medical use and a high potential for abuse. This classification has severely hindered research, blocked access for patients, including millions of veterans, and burdened legitimate businesses with unnecessary regulations.”
* President Donald Trump’s choice for White House drug czar, Sara Carter, has called cannabis a “fantastic” medical therapy. She has also said she is on board with legalization. Trump picked Carter, a journalist, to serve as director of the Office of National Drug Control Policy (ONDCP). Carter has to be confirmed by the Senate.
* Cannabis rescheduling is notably absent from the short list of President Donald Trump’s drug policy priorities. The Office of National Drug Control Policy (ONDCP) instead highlights efforts like putting an end to the opioid crisis and drug trafficking. Trump favored rescheduling in his election campaign but has been silent on the issue so far. On a positive note, at least cannabis is absent from the list of drugs the administration wants to combat. That list includes fentanyl, methamphetamines, xylazine, cocaine and heroin.
* Confirming its inherent bias against cannabis, the Drug Enforcement Agency was recently
paying social media influencers $25-$50 a pop to post anti-cannabis messages. The campaign funding is concerning to reform advocates, given the DEA’s purported role as a cannabis advocate in ongoing rescheduling efforts.
* Interest in hemp-based THC drinks continues to ramp up. Organigram (OGI) recently hopped on the bandwagon with the purchase of Collective Project, which offers the drinks. Collective Project is known for blending art with craft beverages, including cannabis drinks.
Its products are available in Minnesota, Ohio, North Carolina, South Carolina, Florida, Texas, Indiana, Tennessee, Georgia and Kentucky. Its cannabis drinks are sold at the retailers Total Wine and Top 10 Liquors. Collective Project is expanding into Connecticut, New Jersey, Illinois, and Alabama. In Canada, its products are available in Ontario, British Columbia, Saskatchewan, Newfoundland and Nova Scotia.
Hemp-based cannabis drinks are increasingly popular in the U.S., but they could be quickly yanked from the shelves if federal lawmakers close a Farm Bill loophole that permits legalized sales.
State News
* A new poll by Change Research found that 74% of Pennsylvania voters favor legalization of recreational-use cannabis sales. Voters also favor the sale of cannabis through private stores instead of state-run stores, which presumably might resemble unpopular state-run liquor stores. Pennsylvania may be the next big state to flip to legal rec-use sales, possibly this year.
* Oklahomans may get to vote on a recreational-use cannabis legalization initiative next year. Oklahomans for Responsible Cannabis Action (ORCA) is in the process of attempting to collect 172,000 signatures by July to get proposed State Question 837 on the ballot. The state already allows medical cannabis sales.
* The New Hampshire House of Representatives recently approved a bill to legalize cannabis. The bill would permit possession of up to two ounces of flower, 10 grams of concentrate and 2,000 milligrams of THC in other products. Retail sales would remain illegal.
* Consumers continue to vote with their wallets on cannabis. Ohio cannabis sales have surpassed $2.5 billion since the state legalized rec-use sales last August. About two thirds of that was rec-use sales, and the rest was for medical use. New York’s cannabis czar Felicia Reid recently predicted legal sales could hit $1.5 billion this year. Sales surpassed $1 billion last year. Reid is executive director of New York State’s Office of Cannabis Management.
* Florida has sent a cease-and-desist letter to a group trying to put recreational-use cannabis legalization on the 2026 ballot, citing allegations that it “committed multiple election law violations” during its 2024 legalization referendum effort. The Office of Election Crimes and Security (OECS) sent the letter to Smart & Safe Florida.
Among other things, it claims Smart & Safe Florida failed to provide the text of the proposed constitutional amendment to voters when collecting signatures. It also says the group delivered forged and fraudulent signatures, including one from a dead person.
* Texas Lt. Gov. Dan Patrick (R) says he will force the state legislature into an overtime session if it fails to ban hemp-based THC products. Retailers are allowed to sell hemp-based THC products because of a loophole in a 2019 state law intended to support farmers.
* Two more Senate committees in Hawaii have approved a bill that would allow doctors to recommend cannabis for any condition they want. The bill was recently approved by
the Senate Ways and Means Committee and Judiciary Committee.
International News
* “Weed-Care” pilot project participants in Switzerland who were given access to legal cannabis at pharmacies reported lower depression and anxiety. The access to legal cannabis also did not increase consumption. Switzerland is in the process of experimenting with cannabis legalization, and the pilot project is part of that effort.
* General practitioner doctors in Czechia recently got the green light to prescribe cannabis for chronic pain, increasing access to legal cannabis. Previously, only specialists could prescribe.
Medical News
* The cannabis component CBD may be an effective epilepsy treatment, according to a double-blind placebo study. It found that CBD users experienced a 40% reduction in seizures on average, more than double the 18% reduction among placebo users. The study was published in the journal Acta Epileptologica.
* Cannabis is a better sleep aid than prescription and over-the-counter sleep remedies, according to a new poll. The survey found that 70% of people using medical cannabis to help with sleep said cannabis is better than prescription sleeping pills, and 90% said cannabis is better than OTC sleep remedies. The survey was conducted by the medical cannabis company Bloomwell Group GmbH, in Frankfurt, Germany.
* Cannabis may help treat autism spectrum disorder (ASD). A study conducted in Brazil found modest benefits for ASD patients with sleep and anxiety issues. The study was published in the journal Cureus.
* CBD-coated pillowcases help improve sleep by reducing anxiety. A recent study says CBD-coated pillows may minimize potential cannabis side effects while delivering therapeutic benefits. The study was published in the journal Healthcare.
* The cannabis components cannabidiol (CBD) and cannabigerol (CBG) may effectively treat eczema, according to a new study. It was published in the journal Clinical, Cosmetic and Investigational Dermatology.
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