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,
I need to be careful with our headlines! Three weeks ago, I said that the ETF MSOS could bounce, and it plunged to a new all-time low. That’s what I get for calling out a potential reversal for a terrible ETF about which I have actively warned readers for two years now! At least my suggestion at Seeking Alpha about Tilray potentially bouncing worked.
My call today is that perhaps cannabis stocks are ending their almost four-year bear market. I had hoped that the all-time low in the NCV Global Cannabis Stock Index that had been set at 6.93 in October 2023 would hold, but it did not. The index posted a new all-time closing low of 6.81, 1.7% below the old closing low, on Thursday last week, and it set a new all-time intraday low of 6.75 on Friday before rebounding. The index closed on Christmas Eve at 6.99, which is above that old all-time low and the new one too:
The index is now down 13.8% in 2024 with just four more trading days left. To me, a long-time observer of cannabis stocks, the reversal on Friday really stood out. It was futures and options expirations, which impact stocks broadly, including some cannabis stocks that trade on major exchanges, and the volumes for cannabis stocks shot up. The early dip happened as Innovative Industrial Properties shared some bad news before the market opened, sending the stock down sharply.
IIPR, which has dropped 30.2%, is now down more than the Global Cannabis Stock Index in 2024 and trades just above tangible book value. Some of the Wall Street analysts that covered it cut their ratings to Hold or Sell after the plunge. I was not a fan of the stock prior to the news but now have a very large position in my model portfolio that I share with 420 Investor subscribers.
Just over a year ago, we expressed caution regarding the cannabis sector, and we warned against investing in only MSOs. After they did very well to begin the year, we pointed out how risky the MSOs were at the beginning of February. Since then, the performance has been horrible, with the NCV American Cannabis Operator Index declining 64.9% and MSOS dropping 64.0%. That newsletter had a graphic in it for 13 MSOs then in the American Cannabis Operator Index. Since then, here is how they have performed:
These 13 MSOs, not all currently in the American Cannabis Operator Index, have declined a bit more than the index since 2/2/24. Of course, the group is down more since the peak on April 30th, the day that the DEA revealed that is is planning to reschedule cannabis from Schedule 1 to Schedule 3. Of course, the big news here is that this move, if it happens, will eliminate 280E taxation. Since the peak on 4/30, the American Cannabis Operator Index has dropped 66.8%, while the broader Global Cannabis Stock Index has declined by 40.4%. IIPR has lost 32.0% since then .
MSOs have been just terrible in 2024 after outperforming other sub-sectors last year. The IIPR problem is with a large MSO not paying rent. PharmaCann is not publicly traded and hasn’t shared any information about the failure to pay rent on five of the eleven leases. Cronos Group owns a call option that it carries at zero since Q2 after buying it originally in 2021 at $110 million. IIPR dealt with lease issues in 2022 and early 2023 with three different tenants, including one large one, Parallel. Perhaps it will work things out with PharmaCann or replace it as a lessor, but how the elimination of 280E plays out will be a bigger issue.
We have often used this newsletter to boost investing beyond just a single sub-sector, like MSOs, and, as much as I like MSOs now, there are other opportunities in the cannabis sector. MSOs have big risk too if 280E does not go away. While the overall market is down, Ancillary stocks, which we have discussed in the past as better protected than the MSOs, are up 7.9% so far in 2024, while the American Cannabis Operator Index has dropped 47.3%. While I include IIPR and one other Ancillary in my 420 Investor model portfolio, I am very underweight the index now and am loaded up with 5 MSOs. The Global Cannabis Stock Index will be rebalanced at the end of the year, and Ancillary will be 39%, while MSOs and Canadian LPs will each be 21%. There are three other sub-sectors with the balance of the exposure.
So, this newsletter has been cautious about cannabis stocks in the past, and perhaps it was too early to try to get attention on how rescheduling could greatly help the sector. I have been careful every time that I discuss it to point out that it is not a done deal. Still, after almost four years of a bear market, it is time for cannabis stocks to do better. Investor sentiment is extremely poor right now. The potential elimination of 280E is the big story for cannabis, but there are other things that could go well in the U.S., Canada or abroad.
As we wrap up what has been a horrible year for cannabis stocks, we are optimistic that things can and will get better next year. Joel and I wish all of our readers a Merry Christmas and a Happy Hanukkah!
Sincerely,
Alan
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is what we published this past week:
Exclusives
Canadian Cannabis Sales Picked Up in October
Illinois Cannabis Sales Increased Strongly in November
Important Updates
Cannabis REIT Reports Large Default
Mergers & Acquisitions
Cansortium Completes RIV Capital Acquisition
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