Are promises made really promises kept, for President Donald Trump?
No one really knows. So, cannabis equity investors remain depressed.
They can’t get any bullish signals from the administration on Trump’s promised rescheduling – which was one reason they voted for him, if they did.
But there is a way to deal with this uncertainty as a cannabis investor. Shift your focus to getting paid to wait. My non-plant cannabis portfolio in Cabot Cannabis Investor, which holds these “paid to wait” lenders, is up 52% since I launched it on March 29, 2023, through February 25, compared to a 29.4% loss for New Cannabis Ventures Global Cannabis Stock Index over the same time and a 22.5% gain for the Russell 2000 index.
I’ll explain the details on these shadow lenders in a sec.
First, the background here is that moving cannabis to Schedule III from Schedule I under the Controlled Substances Act would be a big deal for cannabis companies. It would create a much-needed and very large tax windfall. Currently, cannabis companies get the short end of the stick from the Internal Revenue Service (IRS). IRS rule 280E blocks them from deducting operating expenses.
It’s not clear how long cannabis companies can survive with this huge handicap, at least not without large equity investor dilution. A big problem for them is that there’s a large wall of debt scheduled to mature in 2026 for publicly traded cannabis companies. It is valued at $2.6 billion.
When that time comes, it’ll be a cannabis lender’s market.
So, the best thing to do now is own the lenders. This is my “get paid to wait” strategy in cannabis. They offer nice dividend yields in the 11% to 15% range.
Here are the two main reasons why it will be a lender’s market in the cannabis sector – which will favor our cannabis lenders paying rich yields.
1) Refinancing in 2026 will be a life-or-death matter for many cannabis companies – including a lot of the companies in the exchange-traded funds AdvisorShares Pure U.S. Cannabis (MSOS), Amplify Alternative Harvest (MJ), Amplify Seymour Cannabis (CNBS), AdvisorShares Pure Cannabis (YOLO), MSOS Daily Leveraged ETF (MSOX), Cambria Cannabis (TOKE) and Roundhill Cannabis (WEED). They’ll have to roll over their debt because they do not produce enough cash flow to pay it off. They will be taking what they can get. The terms won’t be great. Our lenders will call the shots.
2) There’s an equally large $2.6 billion wall of debt maturing in 2026 among private cannabis companies that will need to get refunded. That creates more competition for funding, which also gives our lenders an edge.
Get Paid to Wait
Put all this together, and you can see why it is so important that Trump does not sell cannabis investors down the river by betraying his “promises made, promises kept” mantra on rescheduling. But cannabis sector experts have growing doubts about Trump. This explains why cannabis companies are trading at, or near, all-time lows.
After all, with each new cabinet appointment comes a flurry of archeological digs that find anti-cannabis quotes from appointees. Probably the most jarring is the anti-cannabis stance of Terry Cole, the designee to head the Drug Enforcement Agency (DEA).
He matters because, oddly, the DEA is the lead advocate in rescheduling, even though it is obviously biased against such a change. The cannabis community is not taking this challenge lying down. Doctors for Drug Policy Reform has filed a petition asking a federal court to order the DEA to do a better job of selecting a balanced assortment of witnesses in any rescheduling hearings. The petition was filed by Austin Brumbaugh of the law firm Yetter Coleman. Courts tend to defer to agencies, Brumbaugh told me in a recent interview. So, cannabis investors might not get that much relief.
Cannabis Lenders
Given all the uncertainty swirling in the cannabis sector, part of any cannabis investor strategy has to be “get paid to wait” by owning cannabis lenders.
Cannabis lenders have created a clever way around the prohibition against bankers serving cannabis companies. They borrow money from banks and turn around and lend it at much higher rates to cannabis companies. This gives banks a piece of the action, despite rules against banks lending to cannabis companies. It’s kind of like a legal version of “money laundering.”
The cannabis financiers are sober lenders who, so far, have stayed out of trouble. They know how to assess cannabis markets and cannabis company cash flows. They secure loans against assets (typically real estate or retail sales licenses). They take the safest, top slot in the capital stack. So far, their sober approach to lending to cannabis companies has produced a good record on defaults. I expect that to continue.
True, the stocks of these cannabis shadow lenders won’t jump as much as the top-tier, multi-state operators if rescheduling happens. But their shares will bounce. Meanwhile, you get paid to wait. And it could be a long wait. One cannabis lender executive recently predicted rescheduling will be a 2026 event.
The bottom line: Though it is a year off, the $5.2 billion wall of expiring debt in the cannabis sector coming due in 2026 will help the “get paid to wait” cannabis lenders. My cannabis lenders are up 52% since I suggested them in March 2023, compared to a 29.4% loss for the New Cannabis Ventures Global Cannabis Stock Index and a 22.5% gain for the Russell 2000 index. For the best ones to own – like these – consider subscribing to Cabot Cannabis Investor.
