In a letter outlining his near-term agenda, Senate majority leader Chuck Schumer (D-NY) says passing bank reform favoring the cannabis sector is a top priority.
The letter to Senate colleagues confirms what lobbyists and cannabis company executives have been reiterating for the past several weeks: July could be a turning point for the group, offering legislative developments that push marijuana stocks much higher.
This sets up cannabis as a potentially good short-term swing trade, but it also confirms the bullish long-term prospects for the group.
Note that cannabis lobbyists target the second half of July for progress. This makes sense, since the Senate banking committee – expected to mark up a bank reform bill soon – has other matters it says it wants to take up first.
So, the near-term weakness in the group could continue for a few days until news of progress hits the headlines later this month. My logic here is that cannabis investors are extremely fickle and trigger happy. This is understandable, given how hard the sector has been hit in the past ten months. But it also means cannabis investors and traders are extremely quick to sell if they buy expecting bullish news out of Washington, D.C. and then do not get instant gratification.
What to do now: Cannabis sector weakness over the next several days could be a good trading buy, on expectations of Senate progress later in July. After that, Washington, D.C. goes on break for the month of August. For exposure to this possible move up in cannabis stocks in late July, consider any of the names in our portfolio. For broad sector exposure, consider the AdvisorShares Pure US Cannabis exchange traded fund (MSOS), or the leveraged version the AdvisorShares Pure US Cannabis 2X Daily (MSOX).
Banking Reform Detail
At issue here is a key bank reform bill called the Secure and Fair Enforcement (SAFE) Banking Act, or “SAFE banking” for short. It would allow banks to do business with cannabis companies. This would help them in two ways.
First, dispensaries would no longer be cash-only businesses. This removes a security risk, and makes buying more convenient. Second, cannabis companies would get access to lower cost capital.
There’s also a wild card in the mix. Boris Jordan, the executive chair at Curaleaf (CURLF), has speculated the bank reform bill could contain provisions that allow cannabis companies to “uplist” to more mainstream exchanges like Nasdaq or the New York Stock Exchange. Currently they trade over the counter, for the most part.
Risks
There are risks here, as with any swing trade. First, it is always hard to predict the actions of politicians. Next, Schumer himself cautions passage of the “will not be easy” and requires GOP support. And without singling out SAFE banking, Sen. John Cornyn (R-TX) said in a Senate floor speech that Schumer’s agenda for the summer has so many objectives that it is “wishful thinking.”
However, lobbyist Don Murphy, Director of Federal Policies at Marijuana Policy Project, says the bill in its current form has filibuster-proof support of more than 70 senators.
Another risk is that Schumer or other politicians on the left load the bill up with “social justice” amendments like criminal justice reforms that alienate conservative senators. This has hindered passage in the past. SAFE banking has been kicking around for ten years, and it often has gotten torpedoed by these kinds of amendments.
Meanwhile, as Washington, D.C. lawmakers continue to circle, there is plenty of progress in cannabis markets around the U.S. and in Europe. Here is a roundup of the highlights.
Cannabis Sector Updates
Robust Medical Use Growth
Global medical cannabis sales will grow 23.6% a year over the next ten years, according to a new research report. The report cites increasing demand for medical cannabis for use in managing ailments like Alzheimer’s, seizures, appetite loss and cancer. The analysis, from Reports and Data, also cites expected progress on legalization.
Record High Sales in the U.S.
Massachusetts cannabis sales hit a record high of $152 million In June. The state’s Cannabis Control Commission said recreational use sales hit $132.8 million and medical use sales were $19 million. Recreational use sales were up 10.5% compared to January. Since legal sales began five years ago, the state has reported $5 billion in sales. Flower is the most popular product, followed by vapes, pre-rolls, edibles and concentrates. The average price of flower cannabis dropped to a record low of $5.82 per gram last month, said the commission.
Arkansas sales hit a record high of $141 million in June, up 5% over the prior year. Arkansas only permits medical use sales. Illinois adult use sales hit $127.9 million in June, up 8.6% year over year. Maryland sales hit $21 million in the first week of legal recreational sales in early July. The Maryland Cannabis Administration estimates the state will book $600 million in sales in the first full year of legal recreational cannabis. Six months into Connecticut’s launch of legal recreational sales, the state saw $24 million in medical and recreational use sales in June, a monthly high. The state has booked $122 million in sales in the six months since it launched legal recreational use in January.
States are booking these robust sales gains despite the roughly 30% decline in wholesale prices over the past year.
Keystone State Progress
In a renewed bipartisan effort, two Pennsylvania senators have introduced a new bill to legalize marijuana in the state. Sens. Dan Laughlin (R) and Sharif Street (D) filed the legislation last week.
“With neighboring states New Jersey and New York implementing adult use, we have a duty to Pennsylvania taxpayers to legalize adult-use marijuana to avoid losing out on hundreds of millions of dollars of new tax revenue and thousands of new jobs,” said Laughlin. They estimate legal recreational use sales would bring in $400 million to $1 billion in annual tax revenue.
The two senators sponsored a legalization bill last session that failed. They think the new bill contains changes that will help it get approved. Polls show that two-thirds of Pennsylvanians support legal recreational use.
Gov. Josh Shapiro (D) supports enacting cannabis reform and proposed to legalize and tax adult-use marijuana as part of his 2023-2024 budget request in March. Democrats control the House in this state, and Republicans, who are generally less likely to favor cannabis reform, control the Senate.
European Progress
Germany’s Health Ministry unveiled a draft bill to legalize marijuana last week. The bill proposes the rules for personal use of cannabis, home growing, and the establishment of cannabis growers’ associations. The bill would allow possession of up to 25 grams of cannabis for personal use and home cultivation of up to three plants. It would establish rules for sales through “social clubs,” or Anbauvereinigungen.
Germany will also remove cannabis from its list of illegal narcotics under its Narcotics Drugs Act (Betäubungsmittelgesetz). This will make it easier for Germans to get medical-use licenses.
“Germany is leading while the U.S. is procrastinating,” says Curaleaf executive chair Boris Jordan, whose company has been building its presence in Germany and Europe (see below).
Cannabis advocates expect another measure soon that would set up pilot programs for commercial sales. Germany’s approach is significant because it may serve as a model for the rest of Europe, and at minimum it paves the way for further progress on the continent.
Luxembourg became the second country in the European Union, following Malta, to legalize possession of recreational cannabis, in late June. Malta has also legalized possession. The law permits possession of up to three grams for personal use, and home cultivation. It bars public consumption and the transport of cannabis.
Cannabis Referenda Updates
Cannabis activists in Ohio say they have turned in enough signatures to support a marijuana legalization initiative on the state ballot this November. The campaign was run by the Coalition to Regulate Marijuana Like Alcohol (CTRMLA). A recent poll by Spectrum News and Siena College Research Institute found that 60% of Ohioans support legalizing cannabis.
Cannabis activists in Nebraska have begun collecting signatures to support the placement of medical marijuana legalization initiatives on the 2024 ballot. The campaign is being run by Nebraskans for Medical Marijuana (NMM). A prior effort collected enough signatures, but the state’s supreme court rejected the referendum for violating a rule that requires initiatives to address a single subject only.
Cannabis and the Armed Forces
Rep. Matt Gaetz (R-FL) has proposed an amendment to the National Defense Authorization Act to eliminate cannabis testing for military recruits. The bill aims to help address “a recruitment and retainment crisis unlike any other time in American history,” he said.
Company News
AYR Wellness (AYRWF)
At a time when one of the biggest concerns about cannabis companies is their looming debt because sales growth is softening due to price compression, AYR Wellness announced a deal on July 7 that extends a mortgage loan and lowers interest payments.
The company refinanced a $40 million mortgage for its Gainesville, Fla., cultivation plant. The May 2024 mortgage due date was pushed out to ten years. AYR Wellness also increased the size of the mortgage from $25.3 million. The new loan carries an interest rate of 8.26%.
The extra capital will be used to invest in the Gainesville plant and expand the company’s Florida business elsewhere. This seems like a smart move given what may play out soon in the state. Florida may put recreational-use legalization to voters in 2024. Expanding the market beyond medical use, which is now legal, would create one of the biggest state markets in the country, given Florida’s population of 22 million and estimated 138 million tourist visitors per year. AYR did the refinancing with Needham Bank.
Cresco Labs (CRLBF)
Cresco Labs added two dispensaries in Pennsylvania in late June. The stores opened in Sunnyside Washington and Sunnyside Somerset. This seems like astute positioning ahead of Pennsylvania cannabis market growth.
Pennsylvania is on the short list of states that are likely to approve legalization of recreational use over the next two years. Cannabis companies with medical-use dispensaries in states that approve recreational use benefit, since they already have an infrastructure and supply chain that can be easily converted to recreational-use sales. So, expanding in Pennsylvania ahead of possible recreational-use legalization is a good strategy.
Pennsylvania is under pressure to legalize recreational use, because it is surrounded by states that have recently done so, meaning New York, New Jersey, and Maryland. Neighboring Ohio is also on the short list of states that may legalize recreational use over the next two years.
In other news, Cresco confirmed what many analysts had speculated for weeks. It has to push back the timeline of its expected merger with Columbia Care (CCHWF). Cresco said the reason is that it will not be able to complete the divestitures necessary to get regulatory approval of the deal by the June 30 deadline in the original merger agreement. The company said it is “working amicably” with Columbia Care on the next steps in the transaction, and that it will offer updates in the “near future.”
Curaleaf (CURLF)
Curaleaf continues to build its presence in Europe ahead of expected legalization there over the next few years.
The company on July 5 announced its subsidiary Terra Verde is buying a cannabis processing facility in Setubal, Portugal, from Clever Leaves’ EU-GMP division.
The purchase is part of Curaleaf’s ongoing strategy of building its supply lines ahead of the looming expansion of the cannabis market in Germany. Lawmakers there are in the process of loosening regulations on medical-use sales. The plant will process flower grown at Terra Verde, Curaleaf’s cultivation facility located in Alcochete, Portugal.
“These changes will allow Curaleaf to strategically expand its cultivation capacity at Terra Verde to meet the expected growth across Europe, especially within the core markets of the U.K. and Germany,” said Curaleaf, which dominates the U.K. medical market. “Curaleaf International is setting the stage for responsible, robust growth over the next few years as cannabis adoption accelerates across Europe,” said Curaleaf CEO Matt Darin.
Back in the U.S., Curaleaf announced on July 7 that it launched recreational use sales at its Groton, CT, store.
Cronos (CRON)
May the M&A begin. Cronos has confirmed that it is in talks with potential buyers to explore a sale of the company. Press accounts speculate Curaleaf is one of the potential buyers. Curaleaf declined to comment. Cronos has a small cannabis business that brought in $20 million in the first quarter, but it reports $836 million in cash against a $763 million market cap and minimal debt. Cigarette maker Altria Group (MO) has a stake in Cronos. So, a buyer would get the cash, a small cannabis business, and a connection to Altria, which holds a 41% stake in Cronos.
Organigram (OGI)
Organigram carried out its four-for-one reverse split on July 7. The change allows it to maintain its stock listing Toronto Stock Exchange and Nasdaq Global Select Market exchanges by putting its shares back above the $1 level. Reverse splits can be a bearish signal since stocks often resume their descents following these events.
Trulieve Cannabis (TCNNF)
Trulieve, in late June and early July, announced the opening of two medical cannabis dispensaries in Georgia, bringing the total to four. The opening is part of the company’s strategy of building its presence in the South and Southeast in the midst of an ongoing liberalization of cannabis markets in the regions. On July 12, the company announced the opening of a medical use dispensary in Columbus, Ohio. This dispensary opening positions the company in the state ahead of expected adult-use legalization over the next year or two.
Verano (VRNOF)
Verano today announced the opening of its first social equity joint venture dispensary in Connecticut. Called Zen Leaf Norwich, it is the company’s third cannabis dispensary statewide.
Verano, on July 7, opened a medical-use dispensary in Fort Pierce, FL. The MÜV dispensary in
St. Lucie County is the company’s 70th Florida dispensary and 131st store nationwide. This comes on the heels of a late-June opening of a dispensary in Venice, FL., its fourth in Sarasota County.
Florida’s medical-use market continues to expand as more patients get approved. But the sea change here would come from approval of recreational use. Floridians will get to vote on recreational use in the 2024 elections if the Florida Supreme Court approves a proposed referendum on the issue.
The referendum has garnered enough signatures, but Supreme Court approval is not a given, since the court skews conservative. Conservatives know that a cannabis referendum could work against them in an election by bringing out the liberal vote. Trulieve CEO Kim Rivers, whose company funded the signature drive, has express confidence the referendum language will pass muster. Some analysts speculate we could see a court decision this summer, but the court has until April 2024 to decide.
