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.
Friends,
Cannabis stocks are up so far this year, but this is mainly due to the impressive rally in MSO stocks. The New Cannabis Ventures Global Cannabis Stock Index, which was rebalanced at year-end, currently has 21 members. At year-end, the 7 MSOs were 33.3% of the index. They now account for 42.7% by weight due to their rallies. Our index that includes exclusively MSOs, the American Cannabis Operator Index, is up a stunning 38.5% in 2024 so far, while the Global Cannabis Stock Index is up only 9.7%.
We have been and remain cautious on the MSOs. They are up due to the potential for cannabis to be rescheduled from Schedule 1, which really makes no sense, to Schedule 3. Of course, this would be good for the MSOs, as it would eliminate 280E taxation, which weighs on the industry’s cash-flow. As we have said, though, there is no timeline or certainty about the outcome.
We have been suggesting alternatives for cannabis investors to the MSOs, including Canadian LPs and ancillary companies. One of our favorite ideas was Organigram, but we no longer include that in our model portfolio at 420 Investor after the big rally. We continue to think that some of the Canadian LPs are a good alternative, but they will receive little or no benefit if the U.S. does move to reschedule cannabis.
Another area that we have discussed as an alternative to MSOs is the ancillary sector. These companies do not directly benefit from the elimination of 280E taxation if it takes place, but they will have healthier customers financially if it does go away. The NCV Ancillary Cannabis Index is a good measure of this sub-sector, and it is down 8.3% so far in 2024:
4 of the 7 names in this index, which is lower than where it was on 8/29, are REITs. The remaining 3 include two mixed companies that focus beyond cannabis and only 1 pure-play. The GCSI includes 8 names that are in the ancillary sub-sector. At year-end, this was 38.1% of the index, and now it’s just 31.5%. My model portfolio at 420 Investor is very overweight the sub-sector, with 4 names at 50.6%. I include 1 REIT at about 5%.
We have discussed the potential downside to the MSOs if 280E remains. We last wrote about that three weeks ago, and these risky MSOs are down since then. In the negative scenario of 280E taxation remaining, the ancillary stocks should hold up better due to the facts that they don’t pay that tax and that they are listed on the NASDAQ. We see the ancillary cannabis companies as having better valuations and better balance sheets.
Again, we aren’t sure how investors can bet confidently in rescheduling, though they appear to be doing so. We suggest that investors look to reduce exposure to the rallying MSOs and perhaps consider replacing them with ancillary cannabis stocks.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
Exclusive News
Cannabis Sales Remain Soft in Canada
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Sincerely,
Alan & Joel
