Cannabis stocks are about to make a big move over the next several weeks. This is a good trading opportunity.
What is going to send the group higher?
The Senate should take significant steps to advance key bank sector reform that would help cannabis companies, say lobbyists.
At issue is “SAFE banking,” known formally as the Secure and Fair Enforcement Act. It has been kicking around for years. This is not surprising. Companies that legally sell cannabis (under state laws) are forced to transact in cash because marijuana remains illegal at the federal level. That’s a huge problem. That makes dispensaries targets for thieves. It is inconvenient. And it is a recipe for money laundering.
SAFE banking would solve these issues by carving out an exception to federal rules prohibiting banks from serving businesses that are illegal at the federal level.
The Senate banking committee held hearings on the latest version of SAFE in May. Advance news of the hearing caused a significant move up in cannabis stocks, which then reversed. Industry experts were not entirely happy with how the hearing went, because some of the testimony was lukewarm at best.
Since then, there have been positive developments. Senate Banking Committee Chairman Sherrod Brown (D-OH) said last week he wants to hold a vote on the marijuana banking bill in the next few weeks. This is what would get cannabis stocks moving.
Curaleaf (CURLF) board chair Boris Jordan, who has recently been in Washington, D.C. to lobby for the change, says progress on the bill in the Senate will happen in the last two weeks of July. He says lawmakers may also add a safe harbor for stock exchanges for cannabis company listings, similar to the safe harbor for companies that touch hemp.
This would be a big deal because it might open the way for listings in bigger exchanges, and it is not priced in to cannabis stocks since it is not being talked about much in public. “It would not necessarily 100% guarantee uplisting, but it would open up a dialog because it would give safe harbor to the exchanges,” says Jordan.
Big picture, Jordan thinks the implications of SAFE banking approval would go beyond the letter of the law. That’s because it would represent a major federal law that recognizes the industry. It would “break the glass ceiling,” is how he puts it.
Marijuana Leadership Campaign director of government relations Don Murphy thinks the SAFE bill would be filibuster-proof in the Senate. “A filibuster is out of the question,” he says. “We have the votes to win.” The American Bankers Association (ABA) supports the change. Meanwhile, a new lobbying group has launched to support cannabis reform in Washington, D.C. It’s called the Coalition for Cannabis Scheduling Reform (CCSR). The group is supported by major cannabis companies.
What To Do Now
It makes sense to buy trading positions in cannabis stocks and exchange traded funds (ETFs) on potential moves up between now and the end of July. I suggest any of the names in our portfolio, and the AdvisorShares Pure US Cannabis ETF (MSOS) or the 2x leverage version Advisorshares MSOS 2x Daily ETF (MSOX). I personally favor MSOX for trading positions, because of the leverage.
How to play any near-term move? Any advance in cannabis stocks on July SAFE banking developments will likely be a time for profit taking if you are an active trader. That’s because if it happens, there will then be a lull in activity on SAFE – at least for August, if not longer.
How much you devote to trading positions depends on your approach to interacting with the market. Here are some factors to consider and a suggested tactic.
The starting point is that your number one goal in interacting with the stock market should be to find a way to neutralize emotion. Emotion is the enemy in investing.
One big challenge is the temptation to get involved in trading vs. long-term buy and hold.
To me, buy and hold is the preferred approach because studies show if you miss just a few key days in the market or a stock, you miss out on a lot of the gains. Also, market timing is hard. You have to get both the exit and the re-entry right.
Yet, short-term moves and stories of success trading them are always there to create emotion that can cause you to make mistakes. Personally, I deal with this conundrum by having long-term buy-and-hold positions, and trading positions in the same names. When you do this, you can satisfy the interest in short-term trading, but still be in stocks or the market for those surprise news events that move stocks up sharply. This helps neutralize emotion for me, which is the goal.
The bottom line: It is hard to know what other good news might hit or when, so I’ll just hold through any July SAFE banking move up in cannabis, though I also have a smaller trading position I plan to exit.
Challenges Remain
Owning cannabis names with a three-to-five-year time horizon makes a lot of sense, given the big catalysts I have been discussing in this letter (see below).
But when considering short-term trading positions on SAFE news, be aware that some analysts question the viability of the SAFE bill in the Republican-controlled House. Though a majority of voters favor legal recreational use, the margins are narrower among conservatives. So, conservative lawmakers – like those who now control the House -- are more likely to oppose changes that favor the cannabis sector.
“We do not see a clear path for the SAFE Act to advance through the House as important Republican leaders oppose both the SAFE Act and legalization efforts,” says Jaret Seiberg, an analyst at the TD Cowen Washington Research Group. The bill has passed in the House several times, but that was back when it was controlled by Democrats. SAFE banking bills were reintroduced in both houses of Congress earlier this year.
That said, cannabis is an issue that brings out voters, and this makes it a potential issue for conservatives to exploit. Rep. Nancy Mace (R-SC) knows this, which is why she is encouraging conservatives to loosen their stance on cannabis opposition to attract voters. It remains to be seen how successful she is at changing minds, but give credit where it is due. This is a politically savvy strategy. As for the House, not everyone has given up hope. Jordan, at Curaleaf, notes that House speaker Rep. Kevin McCarthy (R-CA) has supported SAFE banking in the past.
Medium-Term Catalysts
Meanwhile, two of the other big medium-term catalysts for the sector remain in place. They are the German recreational use market opening up, which will start in earnest around the turn of the year, and Florida’s potential 2024 referendum vote on legalizing recreational use. Enough signatures have been collected, and now it is up to the state’s top court to approve the language. This is not a given, because the court has a conservative bias, and politicians on the right know cannabis brings out the liberal vote. If Florida voters approve the referendum, the state’s market would likely open up in 2025. It will be a very large market given the state’s population and tourist traffic.
The bottom line: Outside of the near-term possible move up on SAFE banking progress, expect more pain than gain over the next few months because of ongoing challenging trends like price compression, predicts Jordan at Curaleaf. But 2025-26 will be “very strong” for the group, he says. “I share everybody’s pain. I am one of the biggest casualties.” Jordan says he has put $800 million into the sector. “But I am very optimistic that this will come around. As long as you are investing in sectors that have scale and huge growth potential eventually you get paid. Are we going to get paid? Sure.”
New York Cracking Down
A big challenge for publicly-traded cannabis companies is that they operate alongside illegal businesses that do not have to pay taxes or abide by regulations. Thus, they can easily outcompete on price. The problem has been acute in New York, where illegal dealers sell openly in public with abandon.
This may be changing. New York’s Office of Cannabis Management and the Department of Taxation and Finance have begun shutting down unlicensed stores in New York City. The state can levy fines of up to $20,000 per day.
“There is definitely activity in New York,” confirms Jordan, at Curaleaf. “We are seeing stores close in New York on the illicit side.” When in New York City, Jordan counts the number of illicit stores on his walk from his hotel to his company’s offices. He says the number of illegal operators is declining. “The party may be coming to a slow end.”
New York was the 15th state to legalize recreational cannabis in March 2021. Since then, illicit sales have flourished.
Price Trends Improving
The volume-weighted average spot price of cannabis in the U.S. for the week ended June 2 was $1,087 per pound, down 6.3% year over year, reports Cannabis Benchmarks. This is a big improvement over the regular 30% declines for the past year.
Price trend improvement was strongest in Oregon (+17%), Oklahoma (+6%) and California (-3%). Price trends were the worst in Rhode Island (-43.7%), Arizona (-38.6%) and New Mexico (-36.4%).
“Overbuilding came to a grinding halt, and people are shutting down operations,” says Jordan, at Curaleaf. “We are starting to see a reduction in capacity because there is no capital available to the sector. The industry is becoming more disciplined. It is only spending money on things that can produce returns. This has been terrible for stocks. But it is very good for the industry because it will weed out the weakness and bad-product companies.”
Robust Sector Growth to Continue
Legal U.S. cannabis sales will grow 12% this year to reach $29.6 billion, predicts BDSA, a research firm. In a recent report, the group also projected $45 billion in sales by the end of 2027. BDSA cites growth in emerging adult-use markets such as Missouri, New Jersey, and New York. BDSA thinks global legal-market cannabis sales will reach $36.7 billion in 2023.
A Little Tax Relief
Cannabis companies remain prohibited from deducting most expenses on federal tax forms by an Internal Revenue Service (IRS) code known as 280E. But states continue to come to the rescue.
Connecticut lawmakers recently sent a budget bill to the governor that includes provisions to provide tax relief to licensed marijuana businesses. Other states making similar efforts include Illinois, New Jersey and New York.
At the congressional level, Rep. Earl Blumenauer (D-OR) reintroduced a bill in April that would amend the IRS code to allow state-legal marijuana businesses to take federal tax deductions. De-scheduling under the Controlled Substances Act would also do the trick. The Biden administration has made noises about getting this done, but no signs of progress yet.
Jordan, at Curaleaf, notes that studies conducted in Canada and Israel may be enough to satisfy the medical efficacy and safety research requirements behind any change. That could tighten the de-scheduling timeline significantly. De-scheduling skeptics have noted it would take three to five years for the necessary research to get done.
Campaign Watch
There are two new Republican candidates for president, and neither is a cannabis fan.
Former New Jersey Gov. Chris Christie (R) has long criticized marijuana reform efforts. At the same time, he supports states’ rights, which theoretically suggests he opposes federal laws prohibiting marijuana in states that have legalized. Former Vice President Mike Pence has long opposed even incremental cannabis reform efforts at the state and federal levels. Both candidates have said they believe cannabis is a gateway drug that inhibits productivity.
There are two ways to look at this. One is that it is a negative for the cannabis sector. The other is that competing politicians will recognize cannabis as a wedge issue they can exploit to attract voters by promulgating a more liberal view on legalization. This would be a positive for the group.
Company Updates
Trulieve Cannabis (TCNNF)
Our Trulieve has announced plans to close a retail location in Grover Beach, California, and dispensaries in Framingham, Northampton and Worcester in Massachusetts. Both states have seen some of the biggest cannabis price declines in the past year. The company launched a new dispensary in Phoenix, Arizona.
Trulieve also announced in early June that the Florida Secretary of State has validated over 965,000 signatures supporting a referendum on cannabis in the 2024 election. That is more than enough to get the initiative on the ballot. Now, the Florida Supreme Court has to approve the referendum language. The referendum, which seeks a change to the state’s constitution to legalize recreational use sales, needs
60% of the vote to pass. Polls show more than 65% of Florida voters support the change, says Trulieve.
This reform would be a big deal for Trulieve and other cannabis companies in the state, because of the size of Florida’s population and tourist industry.
Verano (VRNOF)
Our Verano just opened a new dispensary in Florida’s Miami-Dade County in early June.
The company also won a “vertical license” in Alabama that will allow the company to operate a cultivation and processing facility and five cannabis dispensaries. Alabama has a small population of five million. Verano thinks the medical market will be worth $695 million by 2028.
Alabama approved medical cannabis in 2021. Its laws prohibit smokable marijuana and edibles. Medical cannabis will be available as tablets, gels, patches or drinks. Cannabis gummies will be allowed. But they have to be, you guessed it, peach-flavored.
