You’re reading this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news. We post this and all of the newsletters on our website here.
Friends,
We have been warning for quite some time that investors have been ahead of themselves on the rescheduling of cannabis. President Biden first suggested it in October 2022, but no one had confidence then that progress would be made. On August 30th, news hit that the Department of Health & Human Services had recommended to the DEA that it move cannabis from Schedule 1 to Schedule 3, and the market soared. At the end of April, we learned that the DEA was going to reschedule cannabis, and this week it shared the actual proposal.
Again, this rescheduling has a huge potential benefit: It will eliminate the 280E taxation that American cannabis operators pay. It’s not yet a done deal, but it will be financially very helpful to companies that generally have cash flow challenges and capital market constraints.
We have been concerned during this long process that things might not go as expected or that they could take a long time. The good news is that the DEA is moving forward as had been suggested, though it took a long time. The odds of 280E going away have increased.
The MSO prices have rallied a lot since August 29th. Here are the five Tier 1 names, the largest public companies by revenue and market cap:
Since the huge rally on 4/30, they are all down a lot:
We thought the largest MSOs were running up too much and pointed this out to our readers several times. Verano Holdings is actually down 6.3% in 2024, but the rest are up, especially Trulieve. The New Cannabis Ventures Global Cannabis Stock Index, which includes MSOs but also other types of cannabis stocks, is now up 17.6% in 2024. The NCV American Cannabis Operator Index is up less! It has returned 14.3%, and it is down 28.0% since April 30th. Here is the past month in that index:
So, less risk and a more likely big reward, but the stocks are lower? Yes, but it doesn’t mean that they are a buy. At 420 Investor, I include no large MSOs in my model portfolio that aims to beat the Global Cannabis Stock Index despite the big decline since the end of April. I do include 44% MSOs now, but these are not the very largest. 3 of the 4 names are actually down in 2024, and the other is up just 7%. I also include 27% ancillary companies and 27% Canadian LPs.
Investors made a big bet, but that bet has gone bad for many. I have talked about the gambling table here and elsewhere: AdvisorShares Pure US Cannabis ETF (NYSE Arca: MSOS). That ETF is up 16.0% year-to-date, but it has dropped 27.8% since April 30th. The ETF, which is focused solely on MSOs, has very limited exposure to most of them, as it has 82.7% in just the five Tier 1 names.
MSOS has seen its share-count increase 81% in 2024 so far, and it has increased over 100% over the past year:
The fund has bought a lot of shares of the largest MSOs. My concern in the past was that things could go the other way. If MSOS was selling its shares, I was concerned that it would end up slamming the prices of the large MSOs. This is still a risk, but much less of one.
So, investors should understand that the big gains in the largest MSOs coincided with the ETF buying them. This week, there have been no share purchases at all. The ETF is fully invested. Cannabis stocks look better now, and investors can do a lot better than picking the MSOS ETF. A big bet was made very poorly.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most important content from this week:
Exclusives
DEA Opens Cannabis Rescheduling Comment Period
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Sincerely,
Alan
