Missing a Catalyst

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Friends,

Cannabis stocks are beaten up and seemingly cheap, but they are missing a catalyst. There is a big potential catalyst, but it has been deferred. The DEA answered a request from the Biden administration’s Department of Health & Human Services to reschedule cannabis and started a hearing process. Testimony that was supposed to begin this week was cancelled. The rescheduling that the DEA was working on, to take cannabis from Schedule 1 to Schedule 3, would have eliminated 280E taxation, a very big thing for American cannabis operators, if so.

It was never a done deal, a fact that we shared frequently here, and it’s not a dead deal yet. There has been no timeline, and there still is none. We have a new President, but it’s not clear if Trump really was in favor of rescheduling. Still, he may be. I have always thought that progress with federal regulation would need the Republicans on board, and perhaps it will play out now.

This newsletter has been discussing the importance of 280E going away for over two years now. It’s not the only possible catalyst, but it has become extremely important. The market got carried away with the hopes and expectations that the DEA would deliver, and until after it officially announced that it was in the process, I moved from bearish to optimistic regarding cannabis stocks. My optimism remains, but it is challenged.

Cannabis stocks are down in 2025 so far, though the Canadian Cannabis LP Index has rallied 3.8%. The NCV Global Cannabis Stock Index has dropped 5.8% so far after a quick rally that I warned about at 420 Investor. At 6.48, it is now near its all-time low set earlier this month and down from over 92 in early 2021. The NCV American Cannabis Operator Index has dropped 7.9% in January after dropping 45.5% in 2024. The index, which includes 10 MSOs, posted a new all-time closing low yesterday of 7.70, down over 92% since its launch in late 2018:

If 280E remains, it will be devastating for the American cannabis operators, who have a lot of debt on their balance sheets among the large publicly traded ones, with this debt due in 2026 in size. Of course, some have better balance sheets than others. The debt markets are tough for cannabis operators currently, and the alternative would be to sell stock.

The ancillary companies who include American cannabis companies as their customers, including the REITs, which I warned about recently, will struggle on the revenue front. Some of these ancillary companies are debt-free and trading inexpensively currently, but this could be another problem for cannabis investors. There is no impact on Canadian LPs from 280E.

Sure, there are other catalysts, like the higher exchanges beginning to include American cannabis companies,  other countries expanding cannabis legality, hemp-derived cannabinoids becoming more popular and improvement in Canadian regulations regarding cannabis. There is no sign that the NYSE or the NASDAQ are going to change their policies. International expansion continues to happen slowly, but most American cannabis operators are not involved at all. THC beverages are hot, perhaps, but they remain small and also under attack in many states. I wrote about the GTI involvement with Agrify, which is no longer an ancillary company, but the stock has crumbled since I wrote about it as a silly cannabis stock move two months ago. While Canada will be getting a new Prime Minister, there are no signs that the country is moving to wipe out their terrible cultivation tax or to expand edibles, which are overly restricted in THC content.

The cannabis sector is approaching the completion of the fourth year since it peaked in February 2021. It seems cheap to me, but big risks remain, and some markets, like Florida, look troubled. M&A is not very likely at this time. American cannabis companies need 280E to get eliminated. There is no sure sign that this will be happening, but it remains possible. I continue to hope for the best!

Sincerely,

Alan


New Cannabis Ventures publishes curated articles as well as exclusive news. Here is what we published this past week:

Exclusives

Canadian Cannabis Sales Edged Higher in November

The Florida Cannabis Market Is Struggling

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Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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