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,
Happy 4th of July! 2024 has seen its ups and downs for cannabis stocks, and, despite being near the lows of 2024, the New Cannabis Ventures Global Cannabis Stock Index is up 5.7% year-to-date. We are up 7.7% over the past year. This is not exactly fireworks!
Last week, I shared a piece about the better outlook for the industry, which leaves me more optimistic about the stocks, but I concluded that the timing is difficult. I discussed several issues that leave me concerned about the stock action. For those that want to make money on their investments in the cannabis industry, more investors buying the stocks is what will make a difference.
I have been working with cannabis stock investors since 2013, and I offer a model portfolio at 420 Investor that aims to beat the Global Cannabis Stock Index. I have been doing well in beating the index for more than a decade, and the model portfolio is up 17.7% so far in 2024, well ahead of the 5.7% gain in the index.
This past week, we ran an article about the June performance of the index that included how the index changed after the quarterly rebalancing. The allocation by sub-sector changed a lot from the end of March, as the four Tier 2 MSOs exited the index. Now, there are just six MSOs in the index, which was 21.4% of it at quarter-end. The Canadian LPs were also at 21.4%. The largest sub-sector now is the ancillary cannabis companies at 42.9%. Four companies entered from that sub-sector, including one I wrote about two weeks ago, WM Technology (MAPS) as an extremely cheap stock.
I have long shared my view here about the many ways cannabis investors can participate in the growth of the industry. Many investors choose to focus on and and invest in only MSOs, but there are opportunities outside of that sub-sector. My Beat the Global Cannabis Stock Index model portfolio is currently overweight the MSO sub-sector (4 holdings) and the Canadian LP sub-sector (3 holdings) but underweight Ancillary (4 holdings):
While I am underweight ancillaries, I have large exposure. I do own one cannabis REIT, but, looking at my three other non-REIT names, I am actually a bit overweight relative to the index for non-REIT ancillary stocks (30.4% vs. 29.2%).
There are reasons to own stocks in each of the big sub-sectors in my view. The big news of the past year has been the potential rescheduling, which appears to be moving forward, but it’s not a done deal. Again, this would wipe out 280E taxation, which heavily burdens the American cannabis industry. The MSOs, who actually pay this tax, would clearly benefit, while it would have no impact on the Canadian LPs. I continue to believe that 280E being eliminated would be good for the ancillary companies that service the MSOs.
While the Canadian LPs won’t benefit from rescheduling, face a maturing market, and pay a very high tax, some are trading below tangible book value. Two of the three stocks I include in the model portfolio have a lot of cash and no debt. There is a chance that the taxation in Canada could be improved, and there are global opportunities for these companies that are operating on a federally legal basis and trading on higher exchanges. Ancillary cannabis stocks tend to trade on higher exchanges too, and there are some that trade below tangible book value. The multiples to projected adjusted EBITDA can be attractive too.
While MSOs will likely do better if 280E gets eliminated, which is expected, their balance sheets tend to be heavy on debt. This could fuel equity sales on any rally. I am overweight MSOs in my model portfolio, but none are the very largest ones. Of the five Tier 1 names, two are down year-to-date and three are up. The NCV American Cannabis Operator Index has declined slightly in 2024.
We have been advocating for diversification within and outside of the sector in their investments for cannabis investors for a long time. Hopefully, the cannabis sector will have some fireworks to discuss soon!
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most important content from this week:
Exclusives
Cannabis Sectors Have Mixed June Performance
The Global Cannabis Stock Index Ends June Lower
To get real-time updates download our free mobile app for Android or Apple devices, like our Facebook page, or follow Alan on Twitter. Share and discover industry news with like-minded people on the largest cannabis investor and entrepreneur group on LinkedIn.
Use the suite of professionally managed NCV Cannabis Stock Indices to monitor the performance of publicly-traded cannabis companies within the day or over longer time-frames. In addition to the comprehensive Global Cannabis Stock Index, we offer the Canadian Cannabis LP Index, the American Cannabis Operator Index and the Ancillary Cannabis Index.
View the Public Cannabis Company Revenue & Income Tracker, which ranks the top revenue producing cannabis stocks.
Stay on top of some of the most important communications from public companies by viewing upcoming cannabis investor earnings conference calls.
Discover upcoming new listings with the curated Cannabis Stock IPOs and New Issues Tracker.
Sincerely,
Alan
