Cannabis stocks rose sharply in early May on news that Congress is getting serious again about allowing banks to serve cannabis companies. The Senate banking committee will hold hearings on the favorable bank reform May 11.
The reform bill, called the Secure and Fair Enforcement (SAFE) Banking Act, was recently refiled by a bipartisan group of lawmakers in both branches of Congress. The co-sponsors were: Sens. Jeff Merkley (D-OR) and Steve Daines (R-MT), and Reps. David Joyce (R-OH) and Earl Blumenauer (D-OR).
Senate banking committee chair Sherrod Brown (D-OH), said senators plan to “move quickly” on the proposal. One cannabis industry CEO with good contacts in Washington, D.C. says approval by year’s end is possible. This would be a big boost for the sector and cannabis stocks.
The banking reform is sorely needed, to de-risk dispensaries which currently can only take cash in sales, and improve cannabis company access to loans and other sources of funding. The cash-only nature of dispensaries puts a target on them for hold-ups, which seems unfair to employees to say the least. The all-cash nature of the business also opens the door for assaults, tax fraud, and money laundering. The reform would give companies better access to funding and the use of credit cards in stores without risk of a federal crackdown. Cannabis is still illegal at the federal level.
The legislation has passed the House seven times, but the Senate has never held a vote on the measure. This time around, the odds seem at least reasonable that approval may happen, given that lawmakers on both sides of the aisle have introduced versions of SAFE banking in the Senate and the House. The reform has the support of the American Bankers Association (ABA).
What’s the potential timeline for passage? Curaleaf (CURLF) executive chair Boris Jordan – who has good connections in Washington, D.C. – says backers hope to get a Senate vote by July, followed by introduction in the House of Representatives in September, a House vote in the fourth quarter, and a signature from the President in December.
“I am very pleased to see the coordinated effort. I think that there is a lot of momentum in D.C. that finally gets something done,” says Jordan. At the same time, given how predictions of SAFE passage last December failed so miserably, Jordan remains cautious.
“We are out of the business of predicting anything in Washington,” he said. “We’ve learned our lesson. Last year, we really thought we had it over the line in December. We worked so hard on it, and it didn’t happen. So, we’re not going to make any predictions.”
Jordan, however, remains “cautiously optimistic” for two reasons.
One is that this iteration of reform has bipartisan support in both branches of Congress.
Jordan also says a re-energized U.S. Cannabis Council (USCC) under the new leadership of Ed Conklin could make a difference. Conklin previously worked as a lobbyist for Jordan’s Curaleaf, and before that, he was a lobbyist for McDonald’s (MCD) for 25 years. “I think we have very strong management with our lobby group in Washington,” says Jordan.
The Curaleaf CEO predicts a USCC political action committee will raise “substantial” funds to lobby for SAFE banking reform and other cannabis-friendly legislation. “We think that will be very, very powerful, given the massive popularity of legalization of cannabis. We think that will put us on even par with some of the biggest operators in Washington in terms of having the money to be able to lobby.”
What to Do Now
Cannabis stocks could pop Thursday on headlines from the banking reform hearing. This could be an opportunity for traders. But personally, I wouldn’t make a big bet on cannabis stocks on that basis alone. Politicians are too unpredictable, and so are short-term market moves. That said, the current revival of reform prospects confirms the bullish long-term trends favoring cannabis, driven by public support for legalization as demonstrated by multiple polls. I would not buy any spike created by the May 11 hearing. It could be some time before the next catalyst, so any spike that does happen could retrace.
The May 11 hearing will feature testimony from Sens. Merkley and Daines, part of the group of four Senators who reintroduced the bill.
The hearing starts at 9:45 and you can watch it here. The link goes to the Senate banking committee website.
Cronos, a relatively small 3% position in our portfolio, reported a weak first quarter primarily because of setbacks in the Israeli medical market. The company reported $20.1 million in sales May 9, down $4.3 million or 19.5% from the same quarter a year ago. Cronos reported a net loss of $19.3 million. At least that was an improvement of $13.4 million compared to a year ago, thanks to cuts in operating expenses.
Canadian sales advanced 6%, or 14% on a constant currency basis. The company maintained its strong brand position in Canada. Its Spinach brand held the number one market share position in the edibles category, at 15.3% of the market. The Spinach brand is the only brand that holds a top-10 market share position in all categories that it is in, or flower, pre-roll, vapes and edibles.
Israeli medical market sales were hit by increased competition, a slowdown in patient approvals, and political unrest. Despite the challenges in Israel, which severely impacted the quarter, Cronos says it is sticking with the market. It thinks upcoming regulatory changes will make it easier for people to get medical-use permits. Israel should streamline the medical use application process, and increase the number of pharmacies that can carry cannabis. Cronos expects the changes by the fourth quarter.
The potential for growth is big. Right now, about 1.3% of the population has medical use permits, compared to 3.7% in Florida. In other words, the market size could triple. “This is a realistic scenario. We think is possible over the next couple of years,” said Cronos CEO Mike Gorenstein in the earnings call. “We are confident in the long-term potential of our position in the Israeli market.” Cronos has the top-performing brand there, called Peace Natural.
The company guided for full-year sales of $100 million to $110 million, implying significant sales improvements this year, over the first quarter results.
Cronos said it would post $10 million to $20 million in operating cost savings in 2023, and that it will turn cash flow will be positive in 2024. The company reported an impressive $836 million in cash and no debt. Cronos recently had a market cap of $780 million, for a negative enterprise value of $56 million. Trading below cash means if you buy the stock now, you “get the business for free,” as the saying goes.
Curaleaf, our second largest stock position at around 13% of the portfolio, reported record 2022 annual sales of $1.24 billion on May 1. That was a 12% increase over 2021. Operating cash flow was $46 million for the year and the company had $163 million in cash against $623 million in debt. Curaleaf added 28 stores last year and launched three new brands called Endless Coast, Find, and Plant Precision. It also completed several acquisitions, building its presence in Germany.
Fourth-quarter sales came in at $352.5 million, an increase of 14% compared to last year and 4% sequentially, but the company reported a $260 million loss for the quarter, or 36 cents a share. Retail revenue was $277.5 million, up 23% from the fourth quarter of 2021. Retail revenue growth came from the addition of 28 stores, and the expansion of adult-use cannabis around the country. Retail revenue was 79% of total revenue. Wholesale revenue was $73.8 million, down 10% due to price compression and the exit from California. It was 21% of revenue.
The company discontinued operations in the highly competitive markets of California, Colorado and Oregon as a part of a streamlining effort. “We ultimately decided to exit unprofitable states in the West and focus our resources on high-margin, high-return opportunities, such as Florida and Arizona, as well as other markets like Germany and the U.K.,” said executive chair Boris Jordan. He described Germany and the U.K. as “earlier in their growth trajectory and largely untapped.”
Curaleaf projects low- to mid-single-digit revenue growth for 2023. The company cited Europe and expansion in the North American edibles market as significant growth drivers. Expense reductions, including a 10% payroll cut, will net $60 million in annual cost savings for this year.
Green Thumb Industries (GTBIF)
Green Thumb, the biggest position in our portfolio at about 24%, reported first-quarter revenue gains of 2.4% to $248.5 million on May 3. Same-store sales grew by a solid 6% versus the prior year on a base of 73 stores. That helped drive total retail sales growth of 9.4%. This offset wholesale sales declines of 14.7%.
In retail, the metric same-store sales can be a useful gauge because it strips out the impact of store openings and closings. The same-store sales growth confirms the strength of Green Thumb’s Rise dispensaries, and its branded cannabis products like &Shine, Beboe, Dogwalkers, Doctor Solomon’s, Good Green, incredibles and RYTHM.
The company reported net income of $9 million, or four cents a share. Green Thumb posted operating cash flow of $75 million for the quarter, and $185 million in cash. At a time when the sector remains wobbly because of negative pricing trends, this cash strength is important for two reasons. First, it suggests the company will be a winner in the current cannabis Hunger Games. Second, cash-rich companies have the power to build strength with opportunistic acquisitions or store openings to take share. Green Thumb plans to open fifteen retail stores this year in Virginia, Pennsylvania, Minnesota, Nevada, and Florida.
Key Sector Updates From Around the World
House Speaker Kevin McCarthy (R-Ca) says he will allow committee debate and a vote on a bill that would legalize marijuana at the federal level. McCarthy was responding to a request from Rep. Nancy Mace (R-SC) who has sponsored the States Reform Act, first introduced in November 2021. The bill would end federal marijuana prohibition. Mace has not yet refiled the bill. She regularly tries to convince her party to ease up on cannabis restrictions to win voters.
A bipartisan group of congressional lawmakers in late April refiled a bill that would provide a safe harbor to insurance companies that work with state-licensed cannabis businesses. The Clarifying Law Around Insurance of Marijuana (CLAIM) Act is sponsored Reps. Nydia Velázquez (D-NY) and Warren Davidson (R-OH) in the House and Sens. Bob Menendez (D-NJ) and Rand Paul (R-KY) in the Senate.
New Jersey handed a big assist to cannabis companies by making it easier for them to deduct expenses. The move neutralizes the impact of Section 280E in the state. The change means cannabis companies will be able to deduct certain expenses against income on their state returns. Currently, this remains impossible at the federal level because of the 280E provision of the federal tax code.
Medical marijuana sales in Germany could increase fivefold over the next year or two, predicts Curaleaf (CURLF) executive chair Boris Jordan. Germany is in the process of decriminalizing cannabis and removing it from its narcotics list. This should “dramatically accelerate prescriptions issued by doctors,” said Jordan, in the company’s first-quarter earnings call on May 1.
“If these rules are ultimately implemented, we estimate the total market patient count could increase three to five times,” he said. Jordan estimated the medical cannabis market could eventually grow to €10 billion in annual sales, from expected sales of €350 million this year. Germany has a population of 80 million. Curaleaf recently built its distribution strength in the country, via the acquisition of a stake in Four 20 Pharma. “We remain confident that Germany will be a massive market opportunity,” said Jordan.
States netted $3.8 billion in marijuana tax revenue in 2022, according to the Marijuana Policy Project. That was a slight decrease compared to the year before. The group linked the decline to a reversal of the Covid-era spike in the use of cannabis. California brought in the most tax revenue at $1.1 billion followed by Illinois which netted $562 million in tax revenue.
Cannabis analytics firm New Frontier Data predicts U.S. legal cannabis sales could hit $71 billion in 2030 even without federal reforms. That would be more than double the $30 billion in sales last year. “As more established markets across the country stabilize, the U.S. cannabis industry will be buoyed by new markets coming online,” said the research group. The report assumes adult-use cannabis legalization in nine more U.S. markets and legalization of medical use in nine others before 2030. If the 18 states enact cannabis reform, that would lift the number of Americans living in states with legal access to cannabis to 94%, up from 73% now, says the firm.
Marijuana is popular in Missouri. Sales in the state topped $350 million in the first three months of legalization. Illinois took seven months to hit $300 million after adult-use began in January 2020.
Georgia issued its first medical cannabis dispensary licenses in late April. The move is part of a trend of increased liberalization of cannabis laws in Southern states, including Kentucky, Alabama, Texas, and North Carolina.
The Minnesota Senate has approved an adult-use legalization bill, days after the state House passed a similar version. Both bills now go to a bicameral committee to reconcile differences.
The bottom line: States around the country continue to advance cannabis legalization. The federal government may provide the catalyst of banking reform this year. Europe is advancing legalization, too. I think it makes sense to continue to add to the cannabis stocks and exchange-traded funds using limit orders. I’d be cautious about buying any spike created by the May 11 Senate hearing on banking reform. For aggressive sellers, the hearing may create an opportunity to lighten up on positions, but recall that it is notoriously difficult to make short-term market calls.