Cannabis stocks rallied hard Monday, particularly after the close when we learned that the Florida Supreme Court approved a referendum on legalizing the sale of cannabis for recreational use. Florida already permits medical use, but the change would expand the size of the Florida cannabis market significantly, especially considering Florida’s large tourist industry.
To be approved, over 60% of voters would need to support the referendum in the November election. Polls show that a little over 60% of voters say they support legalization of recreational use sales. The fact that there is an abortion rights issue on the ballot may increase turnout among liberals, which would increase the odds of the cannabis initiative getting approved.
Note that four of the nine cannabis companies in our portfolio have large exposure to Florida. So, the news provides a significant boost to our portfolio.
Here’s the medical-use store count in our portfolio. Trulieve (TCNNF) has 133 stores; Verano (VRNOF) has 74; Ayr Wellness (AYRWF) has 64; and Curaleaf (CURLF) has 61. Having a medical-use store in Florida is a big positive because these stores can be readily converted into recreational-use stores. Recreational-use sales may launch in mid-2025 if Florida voters approve the cannabis referendum this November.
What to do now
Unless you have zero exposure to cannabis, I would not buy this rally. Cannabis is a notoriously volatile sector, and the Florida-induced rally may easily fade over the next few days. If you own no cannabis stocks, consider buying a little exposure to get a foothold, and then consider adding incrementally on weakness of 2%-4% or more.
However, I would not sell this rally either. That’s because we could get rescheduling news near term.
This would come in the form of a proposed rescheduling rule published by the Drug Enforcement Agency (DEA). The Department of Health and Human Services (HHS) has recommended moving cannabis to Schedule III from Schedule I. The DEA and the Department of Justice will make the final decision. DEA publication of the proposed rule, the next step in that process, would spark another big rally in cannabis stocks, and it could happen soon.
Rescheduling would help cannabis companies by neutralizing an Internal Revenue Service rule called 280E that bans the deduction of operating expenses against revenue from Schedule I drugs. Rescheduling would boost cannabis company cash significantly.
There are also rumors that the Senate may soon take up the SAFER Banking Act, which would allow banks to serve cannabis companies. Significant action here, like full Senate approval of the bill, would be another major catalyst for cannabis stocks. It is not easy to forecast a timeline on this.
Here is the full list of our portfolio names: Ayr Wellness (AYRWF), Cresco Labs (CRLBF), Curaleaf (CURLF), Cronos (CRON), AdvisorShares Pure U.S. Cannabis (MSOS), AdvisorShares MSOS 2X Daily (MSOX), ETFMG Alternative Harvest (MJ), Green Thumb (GTBIF), Organigram (OGI), Tilray Brands (TLRY), Trulieve (TCNNF) and Verano (VRNOF). For simplicity, consider getting exposure via MSOS or the leveraged version, MSOX.
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