Cannabis Is Great! The Stocks? Hmm...

I know cannabis stocks! I have been running 420 Investor for a bit over a decade. The service is hosted at Seeking Alpha, where I publish a lot of articles. I have been contributing articles there since early 2007, and I write now exclusively about cannabis stocks. You can see all 700+ titles. They are sorted from newest to oldest.

I am more of a stock person than a cannabis consumer. In fact, I haven't had any cannabis at all in almost two years due to my suffering traumatic brain injury on 4/15/22. When I started 420 Investor in 2013, I had not consumed it at all since before I was married in 1990. I don't remember the exact last time before then, but it was in 1989 or perhaps 1988.

When I started 420 Investor, it was just before Colorado transitioned from medical-cannabis only to also adult-use. In early 2014, I flew to Colorado and met some of my subscribers from 420 Investor there. I still remember going into a store and buying it legally. I also remember smoking a joint with two friends that I met for the first time that were Denver residents.

Over the next few years, I consumed a lot of cannabis on trips to California and Colorado and even Canada. My wife was aware of my consumption, which evolved to mainly edibles. Did this help me to do a better job running my 420 Investor service? I don't think so, but it also didn't cause me any challenges.

Cannabis Is Great

In 2013, I realized a lot of things about marijuana. First, that term wasn't the right one, as it had become known as cannabis. I also realized that a lot had changed since my consumption in my college years. This was beyond that it was going to become more available through adult-use legalization by states. The industry was evolving, but it had a lot of work to do. There was a view that was pretty prevalent about how helpful it could be, but there weren't very many research studies yet. A few years later, GW Pharmaceuticals, now owned by Jazz Pharmaceuticals, was able to get an FDA-approved drug on the market, Epidiolex.

I think cannabis can be great. It isn't physically addictive, though some do become over-consumers. This makes it less risky than alcohol or other drugs. I have seen that it can help people with medical conditions like Parkinson's. I know from my own personal experiences that it can make me feel good. So, consuming cannabis can be very good, but the greatness is broader. The economics of legal cannabis can be very helpful to the states that legalize due to taxation and increased employment.

There are a lot of folks out there that think cannabis is only good, but I recognize that there can be problems. First, some people get sick from it. Second, while there is work being done to improve edibles, there is a big challenge with the delay between consumption and impact. This can lead to some consuming too much. Remember how this happened to Maureen Dowd? She discussed this in 2014 when she wrote about it in the NY Times.

So, as great as cannabis can be, it isn't all good for everyone. We need to study it more, and the industry needs to continue to evolve.

Cannabis Stocks Haven't Been Great

As I said, I have been involved as a cannabis analyst since 2013. The actual start for me was in February of that year, when I read an article about a cannabis company on Seeking Alpha. I wasn't even aware then that Colorado and Washington voters had legalized. I also was blown away by how bad the publicly-traded companies were: Penny Stock scams, for the most part!

The first articles I wrote about cannabis stocks at Seeking Alpha convinced several readers and critics on social media that perhaps I was paid off by alcohol companies, tobacco companies or pharmaceutical companies to say such bad things about these companies. No!

In my more than a decade of following this sector so closely, I am happy to say that it has evolved. It's no longer so dominated by scam companies, though many of the cannabis stocks are still just that. It was in 2018 that things really started to improve.

Here is a 10-year chart of the cannabis index that we created at New Cannabis Ventures, the Global Cannabis Stock Index:

The market exploded higher in early 2014 after Colorado stores were able to sell to any adult and not just medical patients. A lot of people got very bullish about the future, but the universe of stocks was tiny.

Here is the last 5 years:

The index launched on 12/31/12 at a value of 100, and it hit there in early 2019. Now, it sits at 8.11, down about 92% since early 2019 and since the launch. The market has been in a terrible bear market since early 2021. In 2023, it fell 16.5% despite the overall market rallying.

Just as I don't view cannabis itself as only good, I don't look at the stocks as great investments all the time. Indeed, they haven't been! I follow 26 stocks closely on my Focus List. The Global Cannabis Stock Index was rebalanced at year-end an now includes just 21 stocks that qualify with a price above $0.50 and a daily trading value in excess of $500K. My Focus List includes 15 of those 21 names and 11 others.

My Focus List (by symbol):

• AAWH

• AYRWF

• CBSTF

• CEAD

• CGC

• CRLBF

• CRON

• CURLF

• GNLN

• GRWG

• GTBIF

• HYFM

• IIPR

• LOWLF

• MAPS

• OGI

• PLNH

• REFI

• SHFS

• SMG

• TCNNF

• TLRY

• TSNDF

• UGRO

• VFF

• VRNOF

The average price change of these 26 names in 2023 was -18.8%, a bit worse than the index. I run a model portfolio for my 420 Investor subscribers with a goal of doing better than the Global Cannabis Stock Index. In 2023, I did outperform the index slightly, falling 15.2%.

What Is Ahead?

I have been talking about two big issues for more than a year: 280E taxation and the lack of higher exchanges for American cannabis operators. The 280E tax, which forces companies that grow, process or sell cannabis to pay a tax on gross profits (revenue less cost of goods) instead of income, was a product of the Reagan administration. It can result in companies with negative net income still paying taxes. On the lack of higher exchanges, American cannabis operators aren't allowed to trade in the U.S. except for the over-the-counter (OTC). This cuts the investor base sharply.

I think that the elimination of 280E or the ability to trade on the NASDAQ would be really good, but I don't count on either of those things happening. The stocks are down a lot and could rally if the DEA reschedules, as 280E would be automatically wiped out if the DEA were to follow the recommendation of the Department of Health and Human Services and move cannabis from Schedule 1 to Schedule 3. There is no time-limit on this process, and a move to Schedule 2 would not end 280E. If 280E does go away, it will not impact cannabis company revenue at all, nor will it improve adjusted EBITDA, a valuation metric. It would help cash flow and EPS.

So, it's not known when or even if 280E will go away, but it's pretty clear that it would really help the stocks of the American cannabis companies. These companies have a lot of debt and not enough cash flow to pay the debt down when it is due in a few years. The stock prices are pretty low and the valuations pretty low too. Selling stock to pay off the debt would not be a good thing for the stock price at these prices, and the companies are struggling to find lenders to refinance the debt. The elimination of 280E and the ability to trade on the NASDAQ would likely raise prices and allow the companies to sell some stock to address the balance sheets, but the lending terms would improve as well.

For those looking at investing in the cannabis market, I think this is a big bet that has to be made right now on cannabis operators that could go well or go poorly. I have found attractively priced Canadian operators and ancillary companies that look better. To learn more about my views, you can read my works at Seeking Alpha. You can get a lot more information at my 420 Investor service.

The stocks are cheap but with a lot of risk. I am not sure how this will play out, but I am prepared to update my outlook as we learn more about this potential rescheduling. Have a great 2024!