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.
Five weeks ago, we talked about how much more attractive cannabis stocks had become, and they then fell sharply the last week of October. November, though, has been a solid month, with the NCV Global Cannabis Stock Index up 8.6% so far. That’s almost as much as the S&P 500, which has rallied 8.9%. The score in 2023, though, is heavily in the favor of the S&P 500, up 18.7% compared to the 19.7% decline in the Global Cannabis Stock Index.
Since our piece five weeks ago, the index has dropped slightly. The longer-term outlook remains positive if 280E taxation goes away following the potential rescheduling, though it’s not yet a done deal and has timing that remains uncertain. We suggested in that newsletter that investors consider other sub-sectors of the cannabis market instead of just the 5 largest MSOs, and this remains the case. There are three major-subsectors that currently comprise over 88% of the index. Ancillary is the largest at 37%, Canadian LPs account for 27%, and the MSOs represent 24%.
Since we shared our thoughts, Ancillaries, which were down then in 2023 by 20%, have bounced a bit. The NCV Ancillary Cannabis Index, now down 17.5% year-to-date, which is less than the 19.7% drop in the Global Cannabis Stock Index, has rallied 3.2%. The Canadian Cannabis LP Index, now down 14.8% year-to-date, has rallied 0.6% over the past five weeks. Our American Cannabis Operator Index, up 11.6% now in 2023, has rallied 1.7%.
For investors looking to take advantage of great valuations, many choices must be made. Besides considering which part of the market to buy, investors need to look at the securities. Some are very down, but buying the worst performers isn’t always the best bet. Last week, we discussed 8 of the 28 stocks currently in the index that were down 40% or more in 2023. One stock of the four of those that I include in my model portfolio at 420 Investor got off of the list, as Village Farms jumped more than 14% last week. I trimmed it but still like it a lot.
We continue to believe that cannabis investors should not focus exclusively on one part of the market. In my model portfolio, I am currently underweight MSOs relative to the index slightly. I have no exposure currently to the largest 5 names. If 280E goes away, we believe that the MSOs could rally a lot, but they could drop if that opportunity goes away. I am less overweight Canadian LPs than five weeks ago, though the model portfolio weighting is slightly above the index weighting. The exposure excludes Canopy Growth and Tilray, which continue to be risky in my view. The largest exposure I have is in Ancillary names, which are about 40%. My cash exposure has gone up to about 10%.
We have done a decent job this year of warning readers about the near-term prospects for the cannabis sector. After the big rally to begin the year, we pointed to the low trading volume, and this continues to be the case. Cannabis stocks are cheap, and there is a potential catalyst ahead with 280E perhaps going away, but we aren’t yet seeing signs of new investors entering the market. Of course, this was the big bet in late August and early September, but cannabis stocks have declined rather dramatically since then. So, stay tuned!
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Alan & Joel