You are receiving this unscheduled update due to recent strength in cannabis names. Your regularly scheduled update will be published on September 13.
For all of the past year, I have been steadfastly bullish on cannabis names. The group was hated, but several underlying trends told us that was likely to change. This set it up as an ideal contrarian play.
Now, the steady buying I’ve been suggesting is paying off.
Using intraday prices on September 5, our portfolio is up 6% this year, compared to a decline of 1.5% for our benchmark, The New Cannabis Ventures Global Cannabis Stock Index.
But this only tells part of the story because it is just a year-to-date tally.
I’m personally up 63% in my AdvisorShares MSOS 2X Daily (MSOX), and you may have similar results because I have been suggesting all year to average down in MSOX with limit orders, and I have been transparent that this is what I was doing.
I’ve also been emphasizing MSOX in our model portfolio, to increase leveraged exposure. As I have been writing, that hurt us for much of the past year on the way down, but it would benefit us on the way up. That’s been the case. For a lot of the past year, we’ve trailed the cannabis index by ten percentage points or more. But now we are ahead of it by 7.5%.
I recently caught up with the CEOs of three of our companies, and two of the best federal drug law experts for updates on timelines of potential federal and state catalysts ahead. “We have this phenomenal pool of catalyst that are lining up,” says Charlie Bachtell, the founder and CEO of Cresco Labs (CRLBF). Below is a roundup of commentary on the five key potential catalysts.
Why Cannabis Stocks Are so Strong
But first, a quick recap of what is moving cannabis stocks.
Cannabis stocks are strong because last week the Food and Drug Administration (FDA) and its parent agency Health and Human Services (HHS) recommend “rescheduling” under the Controlled Substances Act of 1971. HHS and the FDA now say cannabis should be moved to Schedule III from Schedule I.
This is big news because it would liberate cannabis companies from onerous federal taxes. The proposed change would release them from part of the Internal Revenue Service code known as “280E” which bars cannabis companies from deducting most expenses against federal taxes. “This is really a game changer,” says Kim Rivers, the CEO of Trulieve (TCNNF). Cannabis companies pay 70% of their revenue in taxes.
The other key is that the HHS Schedule III recommendation signals the administration of President Joe Biden really is serious about further cannabis law reform. This will speed up progress on other bullish reforms – including changes at the state level. I’ve been writing about these for the past year, but here’s a roundup of catalysts, and potential timing.
Rescheduling Progress
HHS and the FDA made the rescheduling recommendation to the Drug Enforcement Agency (DEA). The next move will be a DEA response, in the form of a proposed rule. We should see that by year end, says Howard Sklamberg, a federal drug law expert who is a partner at Arnold & Porter. He chaired the FDA’s Marijuana Working Group for several years.
That’s an aggressive forecast. But it is realistic, agrees Bachtell, the Cresco CEO, and Shane Pennington another federal drug law expert who is a partner at Porter Wright Morris & Arthur in Washington, D.C. This will be another big catalyst for the group.
In the meantime, we could get a surprise catalyst at any moment, or a leak or release of the HHS rescheduling letter.
But we already know the letter marks an historical event. “It is the first time we have an FDA finding that confirms there is in fact an accepted medial use and low potential for psychological dependance,” says Rivers, the CEO at Trulieve. “This is a real watershed moment for cannabis.”
“You have a federal agency recognizing that cannabis should be off Schedule I, it does have medical benefits, and it is not on par with heroin and fentanyl, which everybody knew,” Curaleaf (CURLF) CEO Matt Darin told me last week. “This is historic.”
After the DEA offers a proposed rule, it will see public comment and administrative law judge hearings. Then comes a DEA recommendation to the Attorney General, and finalization by the administration.
Sklamberg, at Arnold & Porter, expects all of that to happen by the middle of 2024. That would be lightning speed for a process that can take as long as nine years. But he reasons the administration wants to nail down the change before the mad rush to finalize laws that typically happens at the end of the last year of an administration.
Bachtell thinks the whole process could wrap up in the first half of 2024. His company, Cresco, is among the top spenders on federal lobbying. So, he is wired in.
Banking Reform
It looks like we finally may see some real progress in September on the SAFE Banking Act, which is short for Secure and Fair Enforcement Act. The Senate banking committee will likely vote on it this month, and there could be a floor vote in October, says Cresco CEO Bachtell. The House of Representatives could then vote on it near the end of the year.
“We expect progress in September,” agrees Darin at Curaleaf, which also spends a lot on lobbying. “There are two major catalysts between rescheduling and SAFE banking. The fact that you have them side by side is encouraging.” This change would let dispensaries take credit cards, and see lower funding costs. Rivers, the CEO at Trulieve, thinks the convenience of credit cards would boost her company’s revenue by 10%.
State Legalization
In Ohio, voters get to vote on recreational use legalization this fall. A recent USA TODAY poll found 59% percent of Ohioans support legalization, and 35% are opposed.
In Florida, the state’s Supreme Court is reviewing language in a proposed 2024 referendum that would let voters opine on recreational use legalization. It has until April 1 to rule. After that, it automatically goes live, if there is no ruling by then. Rivers, the CEO at Trulieve which has spent tens of millions on the referendum effort, thinks there is a “very strong probability” the court will rule favorably on the ballot initiative. Polls show that nearly 70% of Floridians support recreational use legalization.
In Pennsylvania there is bipartisan support for recreational use, says Darin, the CEO of Curaleaf which operates in the state. He thinks recreational use will be approved in 2024 and launched in 2025. Positive news along the way would be bullish for cannabis stocks.
Progress in Europe
Germany is in the process of decriminalizing cannabis. That will lead the way to other European countries doing the same. The timeline is uncertain, but further progress in Germany over the next year will be a catalyst for the group. “We are very bullish on Europe,” says Darin at Curaleaf, which has been building out a supply chain and distribution presence there. “Europe has total addressable market that is bigger than the U.S. market. This is the most exciting growth opportunity in cannabis right now.”
Price Stability
The sector has been plagued with oversupply. That’s caused 30% year-over-year declines in wholesale prices during much of the past year. But now, so many suppliers have closed, price declines have been leveling off in many markets, and in some markets, prices are increasing, say both Bachtell at Cresco and Darin at Curaleaf. “In general, we are seeing a shallower slope in the price compression line and in some markets we are seeing increases,” says Bachtell. This bullish trend should continue.
What to Do Now
I’m not selling. This is a watershed moment for cannabis stocks. But there are several more major catalysts to come, both this year and in 2024. So it makes sense to buy weakness in any of our portfolio names. Note that weakness is possible since stocks often retrace big moves to some degree. They 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).
