You’re reading a copy of 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.
Friends,
While the overall stock market made a small gain this week, cannabis stocks fell sharply and set a new all-time closing low. The New Cannabis Ventures Global Cannabis Stock Index, which fell 70.4% in 2022, is now down 21.4% in 2023. Since the peak in February 2021, the index has declined 91.8%:
Why Cannabis Stocks Are Under Pressure
As we have discussed, there have been lots of reasons for the negative action. First, the run up in 2020 and into 2021 was driven by two things that have changed. Going into 2020, cannabis stocks were very pressured by a vaping crisis that was followed by the pandemic. Fortunately, that vaping crisis had nothing to do with the legal cannabis industry. Even more fortunate, demand for legal cannabis soared rather than sinking following the pandemic hitting. People had time, money and stress, and they turned to cannabis, which pleased investors. Late in the year, the Democrats took the Senate and the Presidency, retaining control of the House of Representatives. This overly encouraged investors who expected federal legalization that hasn’t advanced at all.
Other factors have been the slowing of growth due to falling demand after that pandemic spike and the rise of production due to legal cannabis companies scaling their production. Access to capital has gotten very limited, and investors have become concerned with outstanding debt. Institutional investors were showing up in late 2020 and into 2021, but they aren’t as active currently. We have detailed how AdvisorShares Pure US Cannabis ETF (NYSE Arca: MSOS) has seen its shares outstanding decline, and this ETF was historically a big buyer of cannabis stocks. That shift has pressured the largest American cannabis stocks. The ETF has 85.9% of its portfolio in 6 stocks.
Another problem has been at the regulatory level. New York’s original plan looked good for the medical cannabis providers in that state, but the plan that was implemented really shut them out. New York isn’t the only state that has been problematic.
We think that cannabis stocks are generally very cheap, but there aren’t buyers. As we have noted, trading volumes are very low. There has been little M&A within the industry, and strategic investors have been absent. The many retail investors still in cannabis stocks would surely like to see a buyer!
Things May Change
While many people got worked up about SAFE Banking, we shared our different view with our readers at the end of April. We continue to point to two things that could happen and that would be meaningful and would likely help cannabis stocks, including the ending of 280E taxation and the potential to uplist from the OTC to a higher U.S. exchange.
We wish we could point to something suggesting that these things will happen soon, but we can’t. On the taxation front, if the DEA reschedules cannabis from 1 to 3 or higher, then the tax would be immediately ended. On the exchange front, there is no law that keeps the exchanges from listing federally illegal cannabis companies, but they choose not to do so. Canopy Growth is trying to close its acquisitions in the USA and retain its NASDAQ listing. We still don’t think that this is likely to happen, but we have pointed to how it could open the door to publicly traded American operators changing their structures to copy Canopy Growth.
Something else that could change, again difficult to predict the timing, is that strategic buyers could step up and buy Canadian LPs or American ancillary companies. British American Tobacco has bought 20% of Organigram at a much higher price over two years ago, and Altria has bought 41% of Cronos Group at a much higher price more than four years ago. We think that if they were to step up and buy the rest or another company were to take over a publicly traded stock in the sector, it would boost interest greatly.
Our Outlook
We continue to be cautious about the sector and to watch for things that may change. The cannabis sector needs buyers, and this, when it happens, will help the very negative sentiment. We have warned our readers about Canopy Growth and Tilray and have even offered some replacements that make sense to us. Cannabis stocks are cheap enough in our view for investors with long-term focus, but the market is treacherous in the short-term.
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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
Exclusives
The Q1 Earnings Season Was Not Especially Helpful
Financial Reports
Cresco Labs Q3 Revenue Drops 3% Sequentially
Security Offerings
Tilray Brands Prices $150 Million Convertible Notes
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Sincerely,
Alan & Joel
