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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. We post this and all of the newsletters on our website here.
Friends,
Canada legalized cannabis for adult-use in 2018, and a lot of investors thought they saw the future for the United States. It wasn’t so easy for the country to get the job done. Recall that Canada already had a federally legal medical cannabis program and that Justin Trudeau, the prime minister since 2015, had included adult-use legalization on his platform when he had run. The process was moving forward, but it almost failed on its “second reading” in the Senate in March 2018. The Cannabis Act passed in June 2018, and the industry has grown dramatically since the first legal adult-use sales in October 2018.
Legalization in the U.S. will be more challenging than it was in Canada. Unlike Canada, America has no federally legal medicinal program. Instead, it is legal under state law in the majority of states. Many of these programs are very different from one another. Of course, about half of the states have legal cannabis for adult-use, though these programs are not similar either. To legalize in the U.S. will create the challenge of coming up with a federal program, which will likely take a lot of time.
The federal illegality of cannabis in the U.S. has created a burden on the state-legal operators. After voters approved the first programs in the 2012 elections (Colorado and Washington), it took almost a year for the Obama Administration to react with the Cole Memorandum. Issued by the Deputy Attorney General, it conveyed that the companies that did not violate 8 specific rules would not be prosecuted by the federal government. That move in August 2013 encouraged me to open 420 Investor, and it excited investors.
Here we are, more than 10 years later, and our situation has improved a lot. Many Americans have access to state-regulated cannabis, which is a good thing! Still, though, the laws have not changed at the federal level, and this has left the industry at risk of the federal government moving away from its being okay with cannabis legalized on a state-by-state basis. When former Attorney General Jeff Sessions rescinded the Cole Memorandum in early 2018, cannabis investors and operators panicked. We have a presidential election this year, and this creates some uncertainty.
For cannabis to become legal in the U.S., Congress will need to legalize it. It has been very quiet on cannabis issues so far, though there are efforts on several fronts. One area of activity has been the SAFER Banking Act, which is in both the House of Representatives and the Senate. If this passes, it would be great for the consumers, as cash use would likely decrease. It could make things easier for cannabis operators, but it may not pass. Even if it were to become law, the largest publicly-traded companies would not benefit greatly, as they already have banking.
In addition to no federal medical cannabis program yet that could provide a basis for a full legalization, the political support is very mixed. Sure, several politicians in both Houses support legalization, but there aren’t any signs yet that this will happen. For cannabis to be legalized, 60 Senators would need to approve it as well as the majority of the House of Representatives. Unlike Canada’s election in 2015, the upcoming presidential election does not have any candidates making cannabis legalization a top issue.
For the cannabis industry to do better, full federal legalization is not necessary. As we pointed out more than a year ago, getting rid of the onerous 280E taxation for cannabis operators would be a very positive move. In late August, the Department of Health & Human Services recommended that the Drug Enforcement Agency move cannabis from Schedule 1 to Schedule 3, which would wipe out 280E. There is no timetable, and it’s not yet clear that the DEA will make this move.
The New Cannabis Ventures Global Cannabis Stock Index reflects the optimism of investors, and we think that they are being too aggressive. It is up 25.4% to 10.17 so far in 2024. Here is the past year, which includes the all-time low of 6.91 set in late October:
If 280E goes away, it will help the financially challenged industry. If it doesn’t, though, the American cannabis companies have cash flow and debt problems. The very largest MSO, Curaleaf, has $496 million in net debt and a tangible book value of -$748 million.
We discussed two weeks ago that the cannabis sector is not in a new bull market yet. The index has declined 0.5% since then. The chart now looks like a double-top, and we warn our readers again to not get overly excited by cannabis stocks. They are cheap, but things may not work out as well as investors hope or as quickly.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most important content from this week:
Financial Reports
Tilray Q3 Cannabis Revenue Falls 5% Sequentially Again
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Sincerely,
Alan
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