Cannabis stocks are up 10%-20% since I encouraged you to buy them on weakness in my last update on October 31.
That’s a nice short-term gain – much better than the 5.5% S&P 500 advance over the same time.
I hope you participated.
Traders may want to book profits. The stocks are strong this morning on news that Ohio voters approved a referendum on recreational use legalization. This rally could reverse. However, cannabis stocks are still down sharply from the rescheduling rally last summer. I suggest continuing to stay long in the midst of the overall weakness since that rescheduling news rally last summer.
Here’s why.
* The rescheduling catalyst has not gone away. It is one of a few possible short-term catalysts, by year end.
* There’s such tremendous cultural momentum toward cannabis reform around the world, it’s hard to believe cannabis stocks will remain ignored and disliked forever. It is tough to think that investors won’t come around in a big way on cannabis names – over the next six months to two years.
We see the powerful cultural momentum in the form of changes in laws, big investments by a large tobacco company, robust cannabis sales growth, poll results and election outcomes (all outlined in more detail below).
These trends tell us cannabis stocks are a strong contrarian buy now that will turn very profitable for patient investors with a medium-term horizon. But there are also some possible robust near-term catalysts for traders – like progress on rescheduling.
Because it can be challenging to stick with stocks in a neglected group, in Cabot Cannabis Investor I document the most important evidence of this powerful cultural momentum which will make cannabis stocks big winners at some point (see below).
Note that cannabis stocks have virtually round tripped the bullish move last summer spurred by news on rescheduling, even though the rescheduling catalyst has not gone away. I highlight why rescheduling remains squarely on the horizon, in the first roundup installment below.
What to Do Now
All stocks in our portfolio remain a strong buy both as a trade for a big advance by year end on probable rescheduling news, and as a medium-term hold as progress on cannabis reform continues – supported by the cultural momentum detailed below.
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. Because of the weakness in the group since the rally last summer, now is a good time to buy.
Cannabis Reform from Around the World
* The biggest development in the past two weeks comes in the form of more evidence that the administration of President Joe Biden is serious about rescheduling cannabis. Rescheduling will be very bullish for cannabis stocks.
This is nuanced analysis, so bear with me on the details.
In a little-noticed development that virtually no cannabis sector commentators are talking about, the U.S. Department of State recently signaled a desire to ring-fence the United Nations’ say on domestic drug policy.
The development seems to clear the way for rescheduling cannabis under the Controlled Substances Act (CSA) – which would be a huge catalyst for the group.
The State Department policy statement, which came in the form of testimony at the United Nations Commission on Narcotics and Drugs, offers further evidence that supports a bullish cannabis sector investment thesis – that the Biden administration is serious about rescheduling cannabis.
The background here is that the 1961 U.N. Single Convention on Narcotic Drugs and the U.N. Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988 prescribe drug scheduling to member states that suggests cannabis should be a Schedule I drug.
The catch for U.S. cannabis companies is that Schedule I status is not good, because it triggers an Internal Revenue Service regulation that bars companies from deducting operating expenses.
This regulation, called “280E,” would no longer apply to cannabis companies under a proposed cannabis policy shift by the Biden administration, namely rescheduling of cannabis down to Schedule III.
The Department of Health and Human Services (HHS) recently asked the Drug Enforcement Agency (DEA) to reschedule cannabis to Schedule III under the CSA. That would be a big catalyst for cannabis companies because it would exempt them from 280E. This would mean they could retain a lot more cash, by being able to deduct expenses.
One perceived obstacle to the HHS proposed rescheduling has been that this would seem to violate the U.N. drug treaties prescribing Schedule I status for cannabis. State Department testimony at the United Nations Commission on Narcotics and Drugs on October 25th rolls back this concern, a cannabis law expert tells me.
The gist of the U.S. State Department testimony is that the U.N. drug treaties are meant to address international drug policy matters between states, and not domestic policy. And that the role of the U.N. is to assist states and not monitor them.
“Our treaties are highly respectful of the legal frameworks of states parties, in particular their constitutional limitations,” said a State Department representative in the U.N. narcotics panel testimony. “The purpose is to promote cooperation among parties so they may address more effectivity the various aspects of illicit traffic having an international dimension, again, an international dimension.”
This marks a big shift in drug policy at the State Department, which in the past has used U.N. drug treaties to justify international and U.S. interference in domestic drug policy of other countries.
The bottom line: That is a lot of detail, apologies. But the gist of this is that the State Department has told the U.N. to back off on interference with domestic drug scheduling. This neutralizes U.N. drug treaties as an obstacle to rescheduling, and rescheduling will be a huge catalyst for cannabis stocks.
* Ohioans have approved a referendum legalizing recreational-use cannabis, in a move that could pave the way for a new multi-billion-dollar market. Currently, only medical-use cannabis is legal in the state.
Assuming the referenda results hold up, which I believe will be the case, Ohio will be the 24th state to legalize recreational marijuana. The District of Columbia has also legalized. Our Curaleaf (CURLF), Green Thumb (GTBIF), and Trulieve (TCNNF) are all well-positioned in the Ohio medical market. A typical tactic of successful cannabis companies is to position with medical dispensaries in states that look likely to legalize, to catch the wave of recreational-use sales after legalization happens.
A potential snag here is that under Ohio law, state legislators can modify or repeal referenda. Several state lawmakers have said they intend to do so with the cannabis initiative. But it seems they intend to do more tinkering around use of tax revenue to subsidize certain dispensaries, rather than gun for wholesale change. Revoking the referendum would be controversial, given the public and political support for rec legalization. Senate Banking Committee Chairman Sherrod Brown (D-OH), for example, says he voted in favor of a ballot initiative to legalize marijuana.
* Wisconsin could net $170 million a year in tax revenue if it legalizes recreational use, says the state’s Department of Revenue. Senate Minority Leader Melissa Agard (D) recently filed a bill to legalize rec use, though approval is not assured, given that Republicans control the legislature. Conservatives are typically more likely to oppose cannabis reform and legalization. Agard says around 70% of people in the Badger State want an end to prohibition, including the majority of Republicans.
* New York state is opening up the application process for dispensary licenses to large multistate operators, like the companies in our cannabis investment portfolio. The application window will be open Oct. 31 through Dec. 19, according to the state’s Office of Cannabis Management (OCM). A year after launching recreational-use sales, New York has only 26 operational licensed rec-use retailers. The OCM has not placed a cap on potential licenses.
* The Senate has approved a bill that would allow Department of Veterans Affairs doctors to issue medical marijuana recommendations to veterans living in states where medical use is allowed. The House has advanced a similar measure. There’s no guarantee the provision will become law. But progress so far backs my thesis that significant cultural momentum on cannabis reform supports the investment case for names in our portfolio.
* Robert F. Kennedy Jr., a popular independent presidential candidate, says the U.S. needs to legalize cannabis use as a way to combat drug addiction. Kennedy wants to legalize rec use at the federal level and use tax revenue to help treat drug addicts. Kennedy says he struggled with addiction for 15 years. Kennedy has also said he wants to legalize some psychedelics. Kennedy’s support for legalization is a good example of the use of cannabis reform as a wedge issue to win over votes, in light of the reluctance of conservative candidates like Florida Gov. Ron DeSantis (R) to support decriminalization of cannabis.
* Connecticut has doubled the amount of recreational-use cannabis that people can buy in a single purchase, pushing the limit up to a half ounce. Limits on medical marijuana purchases, to five ounces per month, will remain unchanged. Connecticut legalized rec use in 2021, and sales volumes continue to grow. Rec-use sales hit $14.4 million in September and medical cannabis sales reached $10.8 million.
* Lubbock, Texas has confirmed that cannabis activists produced enough valid signatures to put a marijuana decriminalization initiative on the local ballot. Lubbock is the tenth-largest city in Texas. About three-fourths of Texans support decriminalizing marijuana, according to a University of Texas poll, but the state has failed to approve reform.
* In a joint letter to President Joe Biden, two political activist groups representing a broad swath of the political spectrum asked the president to de-schedule cannabis under the Controlled Substances Act (CSA).
The groups were the liberal Marijuana Justice Coalition which includes entities like the American Civil Liberties Union, and Human Rights Watch; and the more conservative Cannabis Freedom Alliance which includes libertarian entities like Reason Foundation, and Americans for Prosperity.
The groups asked Biden to de-schedule cannabis completely under the CSA, rather than just move it to Schedule III from Schedule I.
“Any action to move marijuana to another CSA schedule rather than removing it would simply maintain federal criminalization of these programs, licensed companies, and individuals operating in a fully legal manner under existing state rules and regulations,” the groups wrote. “Further, this mere change of scheduling classification as opposed to de-scheduling would not alleviate existing distrust in law enforcement around cannabis given the supermajority public support for ending criminalization.”
A bipartisan group of thirty-one House members has also asked Biden to de-schedule, rather than reschedule to Schedule III.
* U.K. medical cannabis imports tripled this year. Through September 19th, the country imported 23,890 kilos of cannabis compared to 7,762 kilos in 2022. The big growth in imports confirms the popularity of medical-use cannabis, at a time when countries throughout Europe are in the process of expanding legalization. The U.K. approved medical use sales in 2018.
* Arkansas is on track to post record cannabis sales this year. Monthly sales have averaged $23.4 million so far this year. The state has pulled in $23.5 million in medical-use sales tax revenue. Users purchased $211.3 million of medical marijuana during the first nine months of 2023, up from $205 million during the same time period in 2022. Patients have spent more than $965 million on cannabis since medical-use sales launched in May 2019. Since then, the state has collected more than $113 million in tax revenue.
* Representative Nancy Mace (R-SC) has reintroduced a bill to legalize cannabis. The bill, which has gone nowhere in the past, has bipartisan support. It is called the States Reform Act. Mace first introduced the States Reform Act in 2021.
* Georgia in late October became the first state where pharmacies can sell medical cannabis.
* The National Institutes of Health’s (NIH) National Cancer Institute has awarded $3.2 million to the University of Buffalo to study the effects of cannabis on the use of immunotherapy as a cancer treatment. Cannabis can reduce the immune function in the body, which may reduce the effectiveness of immunotherapy.
* Two-thirds of Kansans, including a majority of Republicans, support cannabis legalization, according to a survey by the Docking Institute of Public Affairs. Independents were most likely to favor legalization (76%) followed by Democrats (73%) and Republicans (60%). Gov. Laura Kelly (D) favors cannabis reform, but so far, the legislature is not on board.
* In late October, Ireland approved reimbursement for medicinal cannabis to manage multiple sclerosis.
* Malta in late October granted two licenses to non-profit associations to grow and distribute cannabis. Malta became the first European Union country to end prohibition in 2021. Germany is in the process of doing the same. Malta allows home grow, but cannabis sales for profit are verboten.
* The Department of Health and Human Services (HHS) has released a highly redacted version of a letter to the Drug Enforcement Administration (DEA) proposing cannabis rescheduling. The letter was so heavily redacted it contained no useful information. Several legal challenges seek to extract a letter containing more detail on the recommendation. News reports say HHS has advised DEA to move cannabis to Schedule III from Schedule I of the Controlled Substances Act (CSA). The Congressional Research Service says it is likely that DEA will follow the HHS recommendation, based on precedent.
Portfolio Company News
Ayr Wellness (AYRWF)
In an agreement with debt holders that significantly dilutes stockholders, AYR Wellness has extended the maturity of senior notes by two years to December 2026. Interest on the notes increased slightly to 13% from 12.5%. The company also raised $40 million in new debt as part of the transaction. But the deal comes at a cost in the form of significant stock dilution. Debt holders got new shares equal to around 30% of the outstanding shares, and they also got warrants with a strike price off $2.12. Including this transaction, AYR has retired or extended the maturity of nearly $400 million in debt for two years.
AYR also announced the opening of two Ohio retail locations in Woodmere and Goshen. The move is part of a strategy of positioning in medical-use retail dispensaries in states that are about to broaden out to recreational-use legalization. AYR also has an option to acquire a third Ohio dispensary. The company recently opened a 58,000-square-foot cultivation facility in Parma, Ohio.
Cresco Labs (CRLBF)
Cresco will report quarterly results before the market opens on November 15.
Curaleaf (CURLF)
Curaleaf will report quarterly results after the close November 9.
Cronos (CRON)
Cronos reported robust third-quarter sales growth of 22% year-over-year to $24.8 million on November 8. Losses narrowed dramatically to $1.6 million from $33 million the year before.
“By most financial metrics, the third quarter was one of the best quarters in Cronos history,” said CEO Mike Gorenstein. “We achieved our highest net revenue for continuing operations on record.”
Cronos saw 40% year-over-year sales growth in Canada, driven by strength in pre-rolls, flower and edibles due to the popularity of its Spinach and Lord Jones brands. Its Spinach brand was a top-ten product in in every category that it’s in – flower, edibles, vapes, and pre-rolls. The company launched its Peace Naturals brand in Germany ahead of gradual legalization in that country. Cronos also signed an agreement to ship to Australia.
The company closed the quarter with $840 million in cash.
Green Thumb (GTBIF)
Green Thumb will open its 11th Florida dispensary in Clearwater on November 10. The move is part of a strategy of opening medical dispensaries in states that may soon legalize recreational use, too. Green Thumb will have 87 dispensaries nationwide after the opening.
Organigram (OGI)
Organigram has deepened its partnership with British American Tobacco (BTI), also known as BAT. Not only is this a strong endorsement of Organigram by a global tobacco company, fresh funding from BAT will also support international expansion and product development by Organigram. It has partnered with BAT since 2021.
In a deal announced Nov. 6, BAT will invest $90.5 million in Organigram in exchange for 38.7 million shares. Organigram will use most of the funds to create an investment arm called Jupiter. It will deploy funds to expand Organigram’s geographic footprint and capitalize on emerging growth opportunities around the globe. The deal expands BAT ownership to 30% of common stock, and to 45% equity interest overall, if you include non-voting preferred shares.
Trulieve (TCNNF)
Trulieve opened a new medical dispensary in Marianna, Florida on October 28. Trulieve dominates Florida, and the opening is part of a strategy of positioning in the state ahead of possible recreational-use legalization. As of the end of September, Trulieve had 188 dispensaries in eight states, and 127 of them were in Florida. The company has been the primary funder of a proposed referendum on recreational-use legalization that may get put to Florida voters in November 2024.
The referendum language must be approved by the Florida Supreme Court, to get on the ballot. The court has until April 1, 2024, to issue a ruling, otherwise, the referendum automatically gets approval after that date. Florida would be a huge recreational-use market, given its population of around 22 million people and large tourist industry. Trulieve also has a position in Pennsylvania and Ohio, two other large states that may legalize recreational-use sales over the next year or two.
Verano (VRNOF)
Verano opened a MÜV dispensary in Satellite Beach, Florida on October 27. The opening is part of a strategy of building out dispensaries in medical-use-only states that seem poised to approve recreational use. The new dispensary brings Verano’s Florida dispensary count to 72. Floridians may get to vote on recreational-use legalization in a referendum in 2024. Verano has 135 dispensaries nationwide.
