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 no longer send these by email as we did in the past, but we post this and all of the newsletters on our website here.
Friends,
As we conclude a year that will likely be the fourth consecutive down year for the cannabis sector, it seems few investors are caring about these stocks. I started the year very cautious and expressed the caution here, but I have become significantly more confident that the bear market will end soon or perhaps already has. In November, cannabis stocks melted down further after the Florida voters failed to legalize cannabis for adult-use. In December, the index is down again, falling 4% so far. The NCV Global Cannabis Stock Index remains above the 52-week low set a month ago and the all-time low set in October 2023, but it is down 12% year-to-date:
Last week, I wrote positively on AdvisorShares Pure US Cannabis ETF (NYSE Arca: MSOS), though I was careful to point out that I did not recommend anyone owning the poorly run ETF. I had hoped that the low that was set in November at $4.00 would be a potential double bottom, but the ETF broke down badly yesterday, ending at $3.80. It has dropped 45.8% in 2024, which is a lot worse than the overall cannabis sector.
I have discussed the bullish case for a while, and it remains on track: Rescheduling of cannabis from Schedule 1 to Schedule 3 will wipeout the onerous 280E taxation. This will help boost cash flows of American operators. Of course, there are other bullish things that might happen, but the elimination of 280E overwhelms all other possibilities.
Today, I want to address some risks to cannabis investors that want to bet on 280E ending, which is not a done deal. The good news, as we conveyed last week, the schedule for the testimony in the DEA trial has been set and concludes in early March. While it seems like rescheduling will take place, there continues to be no timeline or guarantee that will end.
The incoming Trump administration could end the DEA process, though I don’t expect this. I do think that the government may look to put a federal tax on the cannabis industry to offset its loss of revenue if 280E gets wiped away, but this will take time to play out, if so.
Beyond the big risk of 280E actually remaining, there are some other challenges for the cannabis market. One of the biggest risks is the very large Florida medical cannabis market, which is dominated by public companies. I discussed it at NCV after the election loss, pointing to it as melting , and the data continues to demonstrate that store growth remains strong with apparent pricing pressure. Of course, other markets could become pressured too, though the Florida situation stands out.
Another risk is that the economy could go into recession. Historically, cannabis was thought to be recession-resistant, like alcohol, coffer or tobacco. The industry has been seeing a lot of pricing pressure for several reasons, including more competition in the legal markets as producers get better and as the illicit market continues to assert itself and also as consumers trade down. A recession could weigh on legal cannabis sales.
Overall, stocks are up a lot this year, while cannabis stocks are not. This could lead to some tax-loss selling over the balance of the month, but not necessarily. There are lots of non-cannabis stocks that are down too. If stocks overall go down, that could also weigh on the sector next year, but the cannabis sector has been so disconnected from the bull market that I don’t think weak stocks would lead to selling.
So, these are some of the risks, and there are other risks too, like the FDA beginning to regulate the market or other markets around the world struggling, but the prices seem to factor in these risks. The main risk, then, is that 280E lives on.
Despite the pounding in MSOs this week, I continue to believe that the market is bottoming. Again, the overall market has held its lows from 2024 and the all-time low from 2023. For many investors, it has always been MSOs exclusively, which is not the right way to address this market, though I do find the MSOs to be extremely attractive right now. The GCSI has a current exposure of just 20% to MSOs, which is behind Canadian LPs at 23% and Ancillary companies at 43%.
The Global Cannabis Stock Index remains at just a fraction of the peak in early 2021. Here is what the chart looks like over the past five years:
The cannabis sector sits near its all-time low and well below the prior all-time low set in 2019 as well as the higher low when the pandemic hit in early 2020. Low prices do not guarantee cheap stocks. As I concluded last week, cannabis investors have had their wallets and patience stretched, but hopefully this massive bear market of almost four years ends soon.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is what we published this past week:
Exclusives
Cannabis Sales Picked Up in November
The New York Cannabis Market Continues to Soar
Mergers & Acquisitions
Organigram Buys Canadian LP Motif for C$90 Million
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Sincerely,
Alan
