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.
Two weeks ago, we warned our readers that we are still in a bear market. Since that newsletter was published, the New Cannabis Ventures Global Cannabis Stock Index has fallen 7.5%. The index is now down 19.5% in 2023:
With the decline since the market peaked on September 11th, the index has declined 32%. It sits just 7.3% above the all-time closing low of 7.29 on August 24th.
Again, we think that rescheduling could lift the American cannabis stocks, as it might wipe out 280E taxation. We warned previously that it may take a while, and the DEA might move cannabis from Schedule 1 to only Schedule 2 rather than to Schedule 3, as the Department of Health and Human Services has recommended. 280E would not go away under that scenario, as we discussed in mid-September when we warned that the stocks of American cannabis operators were riskier.
While the MSOs have retreated recently, the NCV American Cannabis Operator Index is still up year-to-date by 9.8%. Since the peak on 9/11, it has dropped 26.2%. Here are the 5 largest MSOs since then:
The 28% decline on average has been worse than the American Cannabis Operator Index decline. The MSOS ETF, which is about 75% in just these five names, is down 26.8% since it peaked on 9/11.
While the MSOs look more attractive at the lower prices, the failure of 280E to go away would still likely lead to losses for investors. We continue to believe that there is upside if it does go away.
Buying the 5 largest MSOs is not the only way for investors to position for the potential regulatory changes ahead. At 420 Investor, the model portfolio I run that aims to outperform the Global Cannabis Stock Index is currently about the same exposure as the index in terms of its weighing in MSOs at 26%. The exposure is through 2 of the 5 largest MSOs at 7.3%, with the balance in 3 others.
The portfolio is most exposed to the Canadian LPs (50% of the model portfolio), with the 3 holdings all trading below tangible book value. There is no benefit to the LPs if the U.S. gets rid of 280E, but the stocks seem cheap enough to hold their value and perhaps do better. 23% is in 3 ancillary companies. This sector seems cheap, and the prices just printed a new all-time low in the NCV Ancillary Cannabis Index, which is down 20.0% year-to-date. We think that good news for their customers, the MSOs, would be good news for their businesses. These stocks don’t pay the taxes and trade on higher exchanges.
So, this big decline in cannabis stocks has made the sector a more attractive investment in our view. We can find some value in the American cannabis operators after they have pulled back sharply, but it is not universal. Further, if things don’t go as expected with respect to the potential rescheduling of cannabis, there is likely downside ahead. At the same time, we see greater value in the Canadian LP sector as well as the ancillary sector.
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Alan & Joel