Monday after the close, sources close to the Senate banking committee said the panel will delay its vote on key cannabis banking reform known as the SAFE Banking Act. Some investors had expected the vote to happen next week. This update probably helps explain sector weakness Tuesday.
What to Do Now
Earlier this week, our portfolio was up 23% year to date (YTD), compared to 12.1% for the New Cannabis Ventures Global Cannabis Stock Index.
In part because our portfolio is leveraged via an exchange-traded fund (ETF) that theoretically moves twice the amount of the sector, outperformance has narrowed but it is still good. The 11-percentage-point advantage narrowed to six percentage points as of the close Tuesday.
At that point, our portfolio was up 15.6% YTD vs. 9.7% for the index.
I plan to keep leverage on to catch more of the potential upside near term, then possibly reduce leverage into any rally caused by SAFE banking progress.
Meanwhile, weakness is to be bought via any of our portfolio stocks or ETFs. Here’s why.
The SAFE banking vote appears to be delayed, not canceled. Sen. Sherrod Brown (D-OH), who chairs the Senate banking committee, says SAFE could get a committee hearing in the next six weeks. He says lawmakers are close to an agreement on the bill. I don’t put too much faith in timeline predictions by politicians. But they have been circling this issue for so long, his forecast is worth considering.
Curaleaf (CURLF) founder and executive chair Boris Jordan predicts SAFE will be marked up and voted out of the Senate banking committee by October 6. “I am more positive than I have ever been,” he says. This would be a significant catalyst for the group. Jordan expects a Senate floor vote in mid-October, and he thinks SAFE will pass. Another potential catalyst on the horizon.
Jordan also expects Attorney General Merrick Garland at the Department of Justice will soon issue a letter clarifying rescheduling and policy on enforcing federal cannabis laws. He says this would be similar to the Cole Memorandum issued by Attorney General James Cole in 2013 clarifying a hands-off approach to enforcing federal cannabis restrictions. The letter catalyzed growth in the sector at the state level back then. It would be a cannabis group catalyst this time around, too.
SAFE banking would allow dispensaries to use banks. Trulieve (TCNNF) CEO Kim Rivers adds color to SAFE banking impact analysis with an estimate that the use of credit cards would boost her company’s sales by 10%. The proposed law would also give cannabis companies access to other banking services like lines of credit, which would reduce borrowing costs.
Besides the endless delays in the Senate, another potential problem with SAFE is that it still faces challenges in the House of Representatives, now controlled by Republicans who tend to be less favorable towards liberalization of cannabis laws. Some analysts think SAFE can pass the House, but this is not clear.
Jordan, at Curaleaf, who is an active cannabis lobbyist, thinks there is a good chance SAFE will be approved in the House, which has approved similar SAFE bills several times in the past, even though the House is now under Republican control. “Most of the people in the House are still there,” he says. Part of his reasoning is that cannabis is a key election issue. “They weren’t able to get student debt forgiveness done. They need something for the young vote. Cannabis is there.” So, legislators will be pushing for SAFE approval, he says.
The good news for cannabis bulls is that, as I have been writing, there are many other catalysts on the one-year horizon – from further progress on rescheduling, to large states legalizing recreational use. The big ones are Florida, Ohio and Pennsylvania. Another bullish trend is that cannabis prices continue to show signs of stabilizing, after falling sharply for over a year, as suppliers go out of business.
The big story, however, is that there continues to be strong cultural momentum in favor of legalizing recreational cannabis use in the U.S. and Europe, two of the biggest potential markets in the world. I’ve been documenting and verifying this important macro trend in news roundups. Here are more clues that support my thesis.
* State cannabis sales continue to make new records. This confirms the strong cultural momentum in favor of the acceptance of usage and legalization. The momentum is bound to overwhelm political resistance at the federal level at some point. This supports my take that the sector is a medium-term buy and hold – and a group to accumulate on weakness. Here is a roundup of states with continued record sales.
Massachusetts hit record sales of $139.3 million in August after posting record sales in June and July. Sales this year hit $1.05 billion, and total sales since rec use legalization five years ago hit $5 billion. Dispensaries have also sold more than $1.13 billion worth of medical cannabis products since 2018. Last year, cannabis-related tax revenue surpassed alcohol-related tax revenue in the state. Michigan sales hit another record high in July, at $277 million. Illinois dispensaries sold $140 million worth of recreational-use cannabis in July, a monthly record.
Maryland broke another record in August by posting nearly $92 million worth of cannabis sales. New Mexico sales set a new record in August, at more than $48 million in combined medical and rec use sales. Connecticut posted a record $25 million worth of cannabis sales in August. Maine cannabis sales hit a record high in August, reaching nearly $22 million. The state is well on the way to surpass 2022 sales this year. Last month, the governor signed a bill allowing cannabis companies to take state tax deductions as a partial workaround to the Internal Revenue Service code known as 280E which bars deductions at the federal level. This workaround is a trend that continues among states.
* About 60% of Floridians favor recreational use legalization, according to a survey by the University of South Florida (USF) and Florida Atlantic University (FAU). A proposed referendum on rec use legalization requires 60% approval to pass. Florida’s supreme court has to rule on the legitimacy of the proposed referendum language by April. If not, it is automatically approved. About 71% of Democrats support rec use legalization, compared to 50% of Republicans and 59% of independents, the survey found. Around 83% of Floridians support medical use. That includes 87% of Democrats, 84% of independents and 78% of Republicans. A March poll by the University of North Florida (UNF) found 70% support rec use legalization.
* While Germany moves forward with medical use decriminalization, Germans are signaling they want more progress. A recent survey in Frankfurt found that a large majority of citizens favor legalization.
* Cannabis oversupply continues to decline, which firms up pricing. The August cannabis harvest in Oregon fell 42% compared to the year before, says the Oregon Liquor and Cannabis Commission (OLCC). The harvest was 667,267 pounds of net weight, compared to 1,148,924 pounds in August 2022. The ongoing production decline in Oregon means that sharp price declines are leveling off. In Oregon, the median retail price for a gram of cannabis flower climbed to $3.95 in August, from $3.86 in July. Retail prices have been on the rise since April. Oregon’s spot wholesale flower price as of last week was down 3.7% from a year ago. That’s a big improvement over the 30% year-over-year declines for much of the past 18 months.
* California’s Senate approved a bill to legalize cannabis cafes.
* Cresco Labs (CRLBF) ran ads on Spotify in early September, the first time the popular music and podcast platform has allowed cannabis marketing. Spotify reportedly has over 551 million users and 220 million subscribers. The ad campaign promotes Cresco’s popular Sunnyside brand. The ads mean Spotify joins the growing number of large websites and social media platforms that allow cannabis advertising.
* Virtually all unregulated cannabis sold in Canada (92%) test positive for pesticides, compared to 6% for regulated market cannabis, according to a study in the Journal of Cannabis Research. The study had a small sample size. It tested 36 samples from licensed retailers and 24 illicit samples seized by law enforcement. Though the study is small, it confirms other studies, and it supports marketing and lobbying claims that cannabis users are safer buying from regulated distributors in the legal market.
“You’ve got products being sold across the country that are literally poison,” says Jordan, referring to U.S. sales. In addition to pesticides, Jordan cites THCP, a synthetic product that is as much as 30 times stronger than THC found in cannabis. “THCP is the fentanyl of cannabis,” he says. Rescheduling will give the Food and Drug Administration more interest in going after illicit cannabis products on the market, believes Jordan, which will benefit legal providers. To give you an idea how important this would be to cannabis companies, Jordan estimates New York state illicit sales are in the $5 billion range, compared to $300 million in legal sales per year.
* People with health issues like anxiety, depression and chronic pain experience significant improvements in quality of life and less fatigue after they start medical marijuana use, according to a study published in the journal PLOS ONE. The study analyzed the experiences of patients in Australia. This was a single-arm study without a control group. Presumably, though, it is the kind of evidence the Food and Drug Administration may consider under a “real world evidence” exception carved out in a 2016 law, when weighing rescheduling of cannabis.
