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Cannabis Investor
Profit from the Best Cannabis Stocks

June 12, 2024

Since Halloween, the last seven times I have made a call in Cabot Cannabis Investor to buy the AdvisorShares MSOS 2X Daily (MSOX) in sector weakness, the exchange-traded fund has gone up 68% on average over the next one to seven weeks.

The last time I made a trading call to buy the cannabis sector was on May 29.

Since that was less than two weeks ago and the maximum time to profit after trading calls is seven weeks, I am not too concerned about the flat performance of cannabis stocks since then.

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Since Halloween, the last seven times I have made a call in Cabot Cannabis Investor to buy the AdvisorShares MSOS 2X Daily (MSOX) in sector weakness, the exchange-traded fund has gone up 68% on average over the next one to seven weeks.

The last time I made a trading call to buy the cannabis sector was on May 29.

Since that was less than two weeks ago and the maximum time to profit after trading calls is seven weeks, I am not too concerned about the flat performance of cannabis stocks since then.

In fact, I see this as an opportunity. I encourage you to consider adding in the current weakness, or to initiate positions if you have no exposure.

The reason: Several key catalysts still lie on the near-term horizon.

No guarantees, of course, but the catalysts could hit sometime this summer through the end of the year. I’ve written about these catalysts extensively in the past several Cabot Cannabis Investor issues and alerts, so I will not go through them in detail here.

But briefly, there are four to watch for: 1) I believe positive updates on rescheduling could happen during late July through early November (possible final publication of a rescheduling rule). 2) There could be progress on SAFER banking reform in Congress by the end of the year. 3) Floridians could vote to approve recreational-use legalization in November. 4) A “Cole Memo II” could land at any time. This would be a memo from the U.S. attorney general stating that the government will not enforce federal cannabis prohibition in states that have legalized it.

Plus, big picture, as I summarize below, there continues to be tremendous cultural momentum towards cannabis reform. We see this in both opinions and behavior. On opinions, polls consistently show the majority of people think cannabis should be legal. For behavior, note that cannabis is overtaking alcohol in usage.

I’ll let Green Thumb (GTBIF) CEO Ben Kolver summarize the big picture for us. These comments come from his letter to Boston Beer (SAM) founder Jim Koch, in which Kolver suggests a merger of the two companies.

“It is a matter of ‘when,’ not ‘if,’ federal legislation catches up with the American people’s view on cannabis,” says Kolver in the letter. He cites a Gallup poll finding that over 70% of Americans think cannabis should be legal.

Kolver predicts the U.S. legal cannabis market will more than triple in annual revenue to $100 billion over the next few years from $30 billion in 2023 as more states legalize.

He notes that the number of people using cannabis daily recently surpassed those who drink alcohol daily, according to Addiction Journal. We also see the increasing popularity of cannabis in the following data. Cannabis produces more tax revenue than alcohol in all states where cannabis is legal.

What to Do Now

Cannabis stocks are weak enough again to consider entries. Because of the potential catalysts on the horizon over the next several months, and given the current weakness in cannabis names, consider taking both trading positions and multiyear positions now.

Then if a catalyst creates a significant rally (15%-20% or more), consider exiting trading positions and selling covered calls against multiyear positions. Consider selling calls about a month out in time, and starting at two to three points above the current price, and higher.

Portfolio names are: Ayr Wellness (AYRWF), Cresco Labs (CRLBF), Curaleaf (CURLF), Cronos (CRON), AdvisorShares Pure U.S. Cannabis (MSOS), AdvisorShares MSOS 2X Daily (MSOX), ETFMG Alternative Harvest (MJ), Green Thumb (GTBIF), Organigram (OGI), Tilray Brands (TLRY), Trulieve (TCNNF) and Verano (VRNOF). For simplicity, consider getting exposure via MSOS or the leveraged version, MSOX.

In a volatile sector like this, I prefer to add on weakness rather than strength. When we do get a catalyst, that will create a rally in which to trim positions and de-lever a bit. De-lever in this instance means trimming MSOX and putting the funds into cash or the MSOS.

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 cannabis stocks will not remain ignored 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.

* A Fox News poll found that 66% of voters in Florida favor approval of a referendum to legalize recreational cannabis use. Known as Amendment 3, the referendum will appear on the November ballot. It needs approval by 60% of voters to become law. Democrats offered the most support at 76% followed by independents at 71% and Republicans at 57%.

Meanwhile, Florida Gov. Ron DeSantis (R) has launched a political action committee to campaign against rec-use legalization, called the Florida Freedom Fund. DeSantis says legalization of rec use would diminish the quality of life in Florida. The Florida Republican Party also formally opposes rec-use legalization.

The Smart & Safe Florida campaign which supports the rec-use legalization referendum has raised at least $20 million to campaign in favor of the change. The main contributor is Trulieve (TCNNF), Florida’s biggest cannabis company. Other portfolio names supporting the effort include Verano Holdings (VRNOF), Curaleaf (CURLF), Ayr Wellness (AYRWF), Green Thumb Industries (GTBIF) and Cresco Labs (CRLBF).

* As of early June, virtually all public comments on a Drug Enforcement Administration (DEA) proposed rule to reschedule cannabis support the change. Out of more than 11,000 comments, around 97% are positive, according to the cannabis data firm Headset.

Comments are open through July 22. After that, the Department of Justice (DOJ), which houses the DEA, could finalize the rule. This would be a huge catalyst for the group. But it is unclear if the DOJ will hold hearings on the proposed change. That could slow the process. Or a hearing could take place during the comment period, theoretically leading to no delays.

The background here is that the Department of Health and Human Services has asked the DEA and DOJ to move cannabis to Schedule III from Schedule I under the Controlled Substances Act. The move would save cannabis companies tens of millions of dollars each since the change would neutralize an Internal Revenue Service rule barring the deduction of operating expenses against revenue on federal tax forms. The rule is called 280E.

* A little-noticed change in a House of Representatives spending bill could signal significant bullish changes ahead for the cannabis sector, says Owen Bennett, who covers the group for Jefferies.

Bennett notes that a Republican House committee 2025 spending bill includes a modified version of the Secure and Fair Enforcement Regulation Banking Act (SAFER) Banking Act, which would let banks serve cannabis companies.

This gets wonky, but it is important so bear with me.

The key change is that instead of providing protection to depository institutions only, the language provides protections to all financial institutions. It states: “None of the funds made available in this Act may be used to penalize a financial institution solely because the institution provides financial services [to a cannabis business].”

The bottom line: High level, this change could help clear the way for cannabis companies to get listed on U.S. exchanges, opening the way for institutional investors to buy stocks in the space, according Bennett.

Below are excerpts from recent research published by Bennett outlining his logic. First, I’ll provide a Rosetta stone for the acronyms.

In the excerpts below, “FinCEN” is the Financial Crimes Enforcement Network. This is a part of the Department of the Treasury that monitors financial transactions for money laundering and other financial crimes.

“MSOs” means cannabis companies that are multistate operators.

And “Cole Memo” is a reference to a memorandum published by Obama administration attorney general James Cole stating that the federal government would not prosecute cannabis companies in states that have legalized cannabis. Many cannabis sector analysts hold out hope that we may see a new Cole Memo from the Biden administration.

Now, here is the explanation from Jefferies analyst Bennett on why the reference to all financial institutions in the House spending bill could be a big deal for cannabis investors:

“If we look at the definition of a financial institution from FinCEN, it includes ‘banks’, as well as ‘brokers or dealers in securities,’” says Bennett. “Therefore, if this was ultimately to pass … the broader reach for protections vs. just depository institutions, alongside rescheduling, a likely new Cole Memo, and then almost certainly, new updated guidance from FinCEN, could be sufficient incremental developments to finally open up capital markets activity.”

Like many cannabis sector analysts, Bennett notes that one of the factors holding back cannabis stocks is the lack of institutional capital in the sector. The language in the House spending bill provides incremental evidence that this could change.

* Lawmakers from New Hampshire voted a recreational-use legalization bill out of committee and sent it to the Senate and House for a final vote. The bill would then go to Gov. Chris Sununu (R), who has indicated he would sign the bill. Marijuana possession wouldn’t become legal until 2026.

* South Dakota cannabis activists have collected enough signatures to put a recreational-use legalization initiative on the November ballot. The initiative will be called Measure 29. Voters approved a legalization initiative in 2020, but it later was invalidated by the state Supreme Court. It found that the referendum did not address a single subject as required by law. A second initiative in 2022 was rejected by voters. Medical cannabis was approved in a separate referendum in 2020. Several polls have found the fewer than 50% of voters support the change.

* South Africa has legalized cannabis. A bill signed by President Cyril Ramaphosa in late May removes cannabis from South Africa’s list of illegal narcotics, allowing adults to use and grow marijuana. Selling cannabis remains illegal unless prescribed for medicinal purposes. Cannabis, known as dagga in South Africa, was outlawed in 1922. South Africa is the first African country to legalize recreational cannabis use.

* Voters in Slovenia recently approved two cannabis measures. One would allow medical marijuana patients to grow plants for personal use. The other would allow all adults to legally grow and possess marijuana. The sale and use of medical cannabis is already legal, but cultivation is prohibited. The votes are not binding on lawmakers. The Slovenian vote is another example of how cannabis reform is gaining momentum in Europe. Germany removed cannabis from its narcotics list about two months ago, making it much easier for citizens to get medical prescriptions. Malta legalized cannabis in 2021.

* Illinois posted a 9.5% year-over-year increase in recreational-use cannabis sales in April. Sales hit $144.5 million for the month. The growth supports findings from polls and other data showing the growing popularity of cannabis over alcohol.

* A Connecticut medical marijuana panel has agreed to allow access to medical cannabis for the treatment of female orgasmic disorder (FOD). Doctors on the Medical Marijuana Program Board of Physicians unanimously agreed cannabis can help with FOD. The panel also backed a proposal to add autism spectrum disorder as a qualifying condition for the state’s medical cannabis program. The Department of Consumer Protection will make a final decision on the proposed changes.

Company News

AYR Wellness (AYRWF)

AYR Wellness and the cannabis investment company Innovative Industrial Properties (IIPR) seem to think Florida voters will approve a recreational-use referendum in November.

The two companies just inked a $30 million loan deal supporting AYR’s development of a 16-acre property as a cannabis cultivation facility in the state. “We estimate that construction will be complete in mid-2025, with the first harvest expected shortly thereafter,” said AYR CFO Brad Asher.

“We believe there is strong demand for indoor flower in Florida within the existing $2.5 billion medical program. Additionally, if adult-use passes in the November ballot initiative, the construction of this indoor facility, coupled with our 64-store footprint and existing cultivation and production campus, further enhances AYR’s position to capitalize on that potential market opportunity.”

Florida has the largest medical-use cannabis market in the U.S. The state’s cannabis sales would grow to $6 billion if rec use is approved, say CEOs of cannabis companies that operate there.

Green Thumb Industries (GTBI)

Green Thumb says it is interested in merging with Boston Beer (SAM), the beer company that sells Sam Adams. In a letter to Boston Beer founder Jim Koch, Green Thumb CEO Ben Kolver outlines potential advantages, including a possible U.S. listing for his company via a merger.

“We think the combination of SAM and Green Thumb is a powerhouse of brands designed to serve the future U.S. consumer,” Kolver said in a letter Koch, citing the trend towards declining alcohol consumption and increasing cannabis consumption.

Boston Beer dabbles in cannabis with a cannabis-infused iced tea known as TeaPot, sold in Canada. Boston Beer is controlled by Koch because of concentrated voting rights in shares he owns. Kolver published his letter on social media after The Wall Street Journal reported that Japanese whisky maker Suntory was in talks to buy Boston Beer. Suntory says it is not in negotiations to buy Boston Beer.

Trulieve (TCNNF)

Trulieve in late May announced the settlement of a legal dispute which adds two medical dispensaries to its Ohio footprint, in Columbus and Beavercreek. The move is important for Trulieve investors because it comes just ahead the launch this summer of recreational-use sales in the state. Voters approved a rec-use referendum last November. The change could triple cannabis sales to over $2 billion a year in the state. Positioning in medical-use stores in states in the process of legalizing rec use is a key quality I look for in cannabis names. Trulieve fits the bill because of its expansion in Florida, and presence in Ohio and Pennsylvania, which may legalize rec use over the next twelve months.

In early June Trulieve announced the opening of another Florida store, taking its overall store count to two hundred. About 70% of those stores are in Florida. The state may launch recreational-use sales next year. Voters will decide the issue in a referendum in November. A positive vote and the introduction of rec use in Florida could triple annual statewide sales to $6 billion and dramatically boost the shares of Trulieve.

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Michael Brush is an award-winning Manhattan-based financial writer who writes a stock market column for MarketWatch. He is editor of Brush Up on Stocks, an investment newsletter. Brush previously covered the stock market, business and economics for the New York Times, the Economist Group, MSN Money, and Money magazine.