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,
Things definitely changed this week! The DEA is planning to reschedule cannabis from Schedule 1 to Schedule 3. We have never suggested that rescheduling wouldn’t take place, but we were concerned with how much the stocks of the MSOs had rallied in advance of this news. While it’s not a done deal yet, this is a big step forward and would eliminate the evil 280E taxation.
We first wrote about the end of 280E taxes as what the industry and the cannabis stocks need in late 2022. The MSOS ETF was then $10.22, and it is a bit lower now despite the big rally from an all-time low in late August. In the last week of August, when the rumor hit that the Department of Health & Human Services had recommended that the DEA move cannabis from Schedule 1 to Schedule 3, the NCV Global Cannabis Stock Index rallied 21.7%. It exploded this week before pulling back, but it posted a new high for the past year. It has been very volatile:
It’s not so surprising that the sector rallied on Tuesday, when the news hit, but the market is likely a bit ahead of itself. The index closed at 10.52 today, which is up 29.7% so far in 2024. It is up 52.2% from its all-time low set in late October at 6.91. The White House Office of Budget Management must approve the DEA’s move, and there will be a public commentary period. The process should be complete before year-end, perhaps ahead of the elections in November. Still, as we said above, it is not a done deal.
Looking at the action on Tuesday, when the index lifted 20%, some stocks soared that should not have done so, like the Canadian LPs. Rescheduling will have no impact on them. At 420 Investor, I used the big rally to lift cash to the maximum level of 20% in my model portfolio. I invested it on the big dip after, adding mainly two ancillary names. I continue to believe that if 280E goes away, it will help the businesses of the ancillary companies who serve the MSOs. The analysts haven’t changed their forecasts for revenue or adjusted EBITDA, though rescheduling will not likely help either of these metrics. 280E going away will help net income and cash flow from operations.
Investors should be relieved that the DEA has finally taken action, but they should also appreciate that it’s not yet final. There seems to be no need to chase stocks, but being set up to buy makes a lot of sense. I think that there are some ancillary names that could do a lot better if 280E goes away, but the ancillary index is up only modestly quarter-to-date. It is still below its 52-week high too.
The bear market for the Global Cannabis Stock Index, which began more than three years ago, may be over. Cannabis stocks seem cheap and are down a lot from where they are three years ago. If 280E goes away, this is very positive, especially for the MSOs, which are already up a lot. We would like to say that a new bull market has begun, but we aren’t yet ready to say so. The rescheduling is very likely to go through, but it may not, and its failure would weigh heavily on the MSOs. Even if there is rescheduling, the MSOs may sell stock to fix their balance sheets. This is not the time for investors to bet big. Instead, investors should pay close attention and perhaps buy dips.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most important content from this week:
Exclusives
Global Cannabis Stock Index Retreats Before Bouncing Big
One Cannabis Sub-Sector Fell in April
Financial Reports
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Sincerely,
Alan
