Cabot Cannabis Investor Issue: December 24, 2024

Cannabis stocks are set to close out the year with a punishing 14% decline. Cannabis investors need help from anywhere they can get it.

It looks like it could come from an unusual place in 2025. The future of the cannabis industry is now in the hands of President-elect Donald Trump.

If anyone told me a few years ago this would be the case, I might have asked them what they are smoking.

However, the reality is that during his presidential campaign, Trump endorsed all three of the main reforms that would legitimize the industry and boost cannabis share prices: Rescheduling, bank reform known as SAFER banking, and legalization of recreational use. Trump endorsed the first two outright. He implicitly endorsed legal rec-use because he supported the Florida referendum which would have made this change. At the very least, he has openly endorsed decriminalization.

Now it’s go-time for Trump. Here are two main reasons we may see progress under a Trump administration:

1. Trump campaigned on the slogan “promises made, promises kept.” If he keeps his word, we should see him attempt to follow through on the three key cannabis reforms.

2. Voters want the changes. Polls continue to show the majority of voters support cannabis reform, including on the right. Even voters in conservative Florida support recreational-use legalization. In the most recent election, 56% of Florida voters supported the referendum calling for the change. Polls continually show a majority of voters support legalization, even in the more conservative heartland and Southern states.

Here’s a look at the three key reforms, and how they might fare in 2025.

1. Rescheduling

Trump explicitly supports rescheduling cannabis to Schedule III from Schedule I under the Controlled Substances Act (CSA). Of all the possible cannabis reforms on the horizon, this is the big one.

The reason: Moving cannabis to Schedule III would neutralize an IRS provision that blocks the deduction of operating expenses against revenue from the sale of Schedule I substances. The change would instantly give cannabis companies a cash injection that would improve cash flow and earnings per share in a big way. Trump says he favors moving cannabis to Schedule III because it would allow a lot more medical research. Trump cites anecdotal evidence from contacts who tell him cannabis is useful in treating various ailments.

An administrative law judge inside the Department of Justice will hold hearings on rescheduling from late January through early March. We’ll get signs of the odds for rescheduling in the back and forth between witnesses and the judge.

The Drug Enforcement Administration (DEA) inside the Department of Justice (DOJ) seems to oppose rescheduling, which Trump favors. This means rescheduling is shaping up to be another “deep state” challenge for Trump. He’s bent on overriding bureaucratic policy that is out of step with policy reform he and voters support. This was a major campaign theme.

A key factor here will be Trump’s cabinet member nominations. His nomination of Robert F. Kennedy Jr. to lead the Department of Health and Human Services (HHS) is bullish for cannabis. RFK Jr. supports cannabis legalization and allowing banks to serve cannabis companies (SAFER Banking Act).

Trump’s attorney general nominee Pam Bondi opposed cannabis reform as attorney general in Florida. But that might not tell the whole story. “To be fair, she was following the governor’s direction on that at the time, in that role,” says Trulieve (TCNNF) CEO Kim Rivers. She thinks Bondi will be positive for the group. “I think she is a great pick,” says Rivers.

RFK Jr. and Bondi are the key nominees to watch, since they will play a big role in rescheduling. It will be a month or more before we know who actually gets appointed to these roles. Nominees have to go through Senate hearings before the Senate votes on them.

Wild card prediction: Former New Jersey governor Chris Christie recently speculated in a media interview that the Trump administration would skip rescheduling and fully de-schedule cannabis instead.

2. Banking Reform

Passage of the SAFER Banking Act in the House and Senate would be a major catalyst. The reform would allow banks to serve cannabis companies so they no longer have to be cash-only businesses. Even signs of progress would be a group catalyst.

It is always tough to put odds on lawmaking. One positive, though, is the recent choice of Rep. French Hill (R-AR) to lead the House Financial Services Committee. Hill has voted for the banking reform bill in the past.

Plus, rumors are circulating that Trump is telling senators that he wants the SAFER Banking Act to get approved because it would make cannabis stores safer, and also because it would reflect poorly on Democrats who consistently failed to get the reform bill passed.

3. Decriminalization

Full legalization at the federal level looks challenging. This would require a new law. But both sides of Congress are dominated by Republicans, who on the whole are less amenable to this change. Republican lawmakers have already signaled they have no problem going against Trump’s wishes. Despite Trump’s popularity, Republicans recently defied him by rejecting his proposal to eliminate the debt ceiling in the continuing resolution funding bill.

Yet, there is momentum for this change. Polls continue to show a majority of voters favor decriminalization and even the legalization of recreational use, even on the right and in more conservative states. Plus, states continue to legalize, another popular endorsement of the reform. For example, Pennsylvania looks like the next big state to legalize recreational use. This could happen in 2025. This timeline makes sense, because the state is losing considerable tax revenue to surrounding states, almost all of which have legalized rec use. Governor Josh Shapiro (D) supports the change.

“Throughout his campaign, President-elect Trump confirmed his support for commonsense cannabis laws, support for SAFE banking and for rescheduling, the fact that no one should be arrested for personal cannabis use, and a state’s rights approach to cannabis legalization,” noted Cresco Labs (CRLBF) CEO and co-founder Charlie Bachtell in his earnings call. “We look forward to working with the incoming administration to follow through on its commitment to developing a commonsense approach to cannabis laws including the passage of SAFE banking, rescheduling, and the fact that no one should be arrested for personal cannabis use.”

The bottom line: 2025 will be showtime for Trump on cannabis reform. He’s got a busy agenda, taking on big issues like immigration and government spending. But if he lives up to “promises made, promises kept,” cannabis stocks could move higher.

What to Do Now

The best time to buy stocks is when they are widely hated, but plausible catalysts lie on the horizon. That is clearly the case with cannabis stocks now. But this is also the hardest time to buy stocks. That resistance may also be a signal to buy. As a general rule, some of your best stock purchase decisions will be the ones that are the hardest to make.

Consider taking both trading positions and multiyear positions in portfolio names now, or averaging down. I am personally averaging down in the current weakness.

Portfolio names are: 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.

Cannabis News from Around the World

Part of my core thesis for being bullish on cannabis stocks is that there continues to be tremendous cultural momentum toward cannabis reform around the world. I’m convinced institutional investors will not ignore cannabis stocks forever.

We see evidence of this powerful cultural momentum in the changes in laws to legalize cannabis, big tobacco investments in the space, robust cannabis sales growth in states that legalize, increased cultural acceptance in the form of relaxed drug testing standards in sports leagues and the workplace, and poll results that show a growing majority of people support legalization regardless of age and party affiliation.

These trends tell us cannabis stocks are a strong contrarian buy that will turn very profitable for patient investors with a medium-term horizon. The sector is so volatile, it is easy to get shaken out of names by heightened emotional reaction to drawdowns. So, it is important to catalogue evidence of this cultural momentum. That is the purpose of this section of Cabot Cannabis Investor.

The bottom line: The developments below show that consumers continue to vote with their wallets in favor of cannabis use, polls show a majority of voters want legalization even in Southern states, and major league sports figures continue to lobby for cannabis use destigmatization.

* States collected more than $9.7 billion in cannabis tax revenue since the middle of 2021, says the Census Bureau.

* Missouri’s cannabis sales hit a monthly record of $128.07 million in November. That total topped the previous monthly record of $123.25 million in October. Recreational sales of $113 million accounted for 88% of the total. Medical marijuana sales accounted for $15.04 million. Missouri is a billion-dollar-plus annual market, making it one of the leading states for cannabis sales.

* Michigan cannabis stores sold 103,129 pounds of rec-use cannabis in November, breaking the monthly record of 100,894 pounds from August, according to the Michigan Cannabis Regulatory Agency.

By dollar amount, November sales came in at $276.4 million, below the August total of $295.4 million, because of ongoing price declines. The average price for an ounce of cannabis fell to an all-time low of $71.80 in November, down from $80.14 in August. So far, Michigan stores have sold more than $3 billion in rec-use cannabis for the year, an annual record since rec-use cannabis was legalized five years ago.

* A Nebraska judge recently denied a motion that would have prevented the state’s governor from approving the results of two referenda which would greenlight medical cannabis sales. A legal challenge to the initiatives is still working its way through the courts.

* Voters in Tennessee want legalized cannabis. A recent survey found that 63% of voters support the legalization of recreational-use cannabis. Even Republicans favor the change. The survey found 53% of Republicans want cannabis reform, and 78% of Democrats support it. The Vanderbilt Poll found 36% of voters oppose the change. Support for an end to prohibition was up three percentage points from May.

* Teen use of cannabis continues to decline, even as more states legalize marijuana. Cannabis use among 8th, 10th and 12th graders is now lower than before states began legalizing rec-use in 2012. Teens also increasingly say ease of access is declining, even as more stores open. The data come from the Monitoring the Future (MTF) Survey, which is supported by the National Institute on Drug Abuse (NIDA).

Portfolio Company News

Organigram (OGI)

Organigram posted a 22% fiscal fourth quarter sales gain to $44.7 million on December 18. For the full fiscal year, sales increased 6% to $159.8 million. The company cited higher recreational-use sales and higher international sales.

Organigram cut costs, which boosted fiscal fourth-quarter adjusted gross margin to 37% of revenue, compared to 20% the prior year. Adjusted EBITDA was $5.9 million compared to $0.1 million in the prior year.

Organigram posted a net loss of $5.4 million, compared to a net loss of $26.6 million in the same quarter a year before. The results were for the calendar year third quarter, which is the company’s fourth quarter.

“We are pleased with the growth we achieved every quarter in Fiscal 2024, ending the year on a high note with respect to net revenue and adjusted EBITDA,” said CFO Greg Guyatt. “Efficiency improvements in our operations supported our strong adjusted gross margin in the quarter.

The company closed the quarter with $133.4 million in cash compared to $51.8 million the year before, primarily because of investments in Organigram by British American Tobacco (BTI).

After the quarter closed, Organigram became Canada’s largest cannabis company by market share following the acquisition of Motif Labs for $55 million.

Trulieve Cannabis (TCNNF)

Trulieve announced the opening of a new medical cannabis store in Columbus, Georgia.

Cannabis Plus Insider Portfolio News

Chicago Atlantic Real Estate Finance (REFI)

The private cannabis company Vireo Growth, in which Chicago Atlantic Real Estate Finance is the largest stockholder, recently announced it is merging with three cannabis companies. They are: Proper Cannabis (Missouri), Deep Roots Harvest (Nevada), and WholesomeCo Cannabis (Utah). Through the merger with Wholesome and Proper, Vireo gets ownership of Arches, an analytics and distribution technology platform. Arches is a joint venture between Wholesome and Proper. Vireo also acquires nine cultivation facilities and 48 cannabis stores in the deal. Vireo paid for the $397 million transaction in part via an equity offering.

Chicago Atlantic Real Estate Finance also recently declared a dividend of $0.47 per common share for the fourth quarter of 2024. This works out to a $1.88 per share dividend, for an 11.87% annual yield.

Sector Performance

Our Cabot Cannabis Plus Insider Portfolio is doing very well. But our plant-touching Cabot Cannabis Investor portfolio is trailing.

The blended return of the two portfolios is a 16.8% gain through December 20, compared to a loss of 14% for the New Cannabis Ventures Global Cannabis Stock Index.

Because our plant-touching cannabis portfolio is leveraged, it lags in severe sector downturns. That is the case now. Our Cabot Cannabis Investor portfolio cannabis portfolio was down 44.9% this year as of the December 20 close. The decline was worse than the 14% loss for the New Cannabis Ventures Global Cannabis Stock Index.

Our plant-touching portfolio is leveraged because of the large position in AdvisorShares MSOS 2X Daily (MSOX). It is a top-five position. The leverage hurts us when the sector is weak. Likewise, it helps capture more upside as we see progress on rescheduling cannabis and progress towards approval of recreational use in more large states like Pennsylvania.

When we get a significant sector rally, I will roll back leverage by trimming MSOX in favor of cannabis stocks or the AdvisorShares Pure U.S. Cannabis (MSOS) ETF. If you are a highly active trader, it would make sense to deleverage into rallies in the same manner along the way and then hope for a pullback to re-lever.

Our Cabot Cannabis Plus Insider Portfolio is faring much better. This one invests in cannabis-related names that do not touch the plant, where insiders are buying. It is up 56.82% since I launched it on March 29, 2023, through December 20. That’s over twice the 26.6% gain in the Russell 2000 index over the same time.

The portfolio is well positioned to outperform because investments in Chicago Atlantic Real Estate Finance (REFI) and AFC Gamma (AFCG) pay attractive yields of 11.76% and 14.72%. The dividends were recently confirmed even though they look suspiciously high.

Portfolio

Canna Plus Insider Portfolio

*Includes dividends by adjusting down the entry price to incorporate dividend payouts

Company Profiles

Ayr Wellness (AYRWF) is a vertically integrated multistate operator based in Miami. It has over 90 dispensaries. It operates in Florida, Illinois, Massachusetts, Pennsylvania, New Jersey, Nevada, Ohio, and Connecticut. Ayr has 18 grow and production sites, around a dozen national brands, and a proprietary library of over 160 cannabis strains. Like many names in our portfolio, Ayr is strategically positioned in states that look poised to approve recreational-use sales. It has over 60 stores in Florida, for example.

Ayr has built out its brand development strength with the appointment of David Goubert as president and CEO. Goubert previously served as president and chief customer officer at Neiman Marcus Group, and he was at LVMH for 20 years before that.

Ayr is currently launching brands from its national portfolio in New Jersey, including Ayr’s Lost in Translation flower, Kynd flower, Road Tripper flower, STIX pre-rolls, Entourage vapes, Secret Orchard vapes, and Wicked soft lozenges.

Ayr recently reported $71 million in cash and $607 million in net debt. This debt overhang is one reason why Ayr trades at 0.15 times sales. The company is founder-run, which can be a plus in investing. BUY

Cresco Labs (CRLBF), based in Chicago, has the #1 market share position in Illinois, Pennsylvania and Massachusetts. The company has the top-selling branded portfolio of cannabis products in the industry. It has the top of branded flower and branded concentrates, and the third-best portfolio of branded vapes.

Cresco offers exposure to many attractive U.S. markets with an emphasis on Illinois. It is also in Pennsylvania, Ohio, New York, Massachusetts, Michigan, Florida, Missouri, and Maryland. Most of those are states that recently expanded into recreational use sales, or are expected to over the next two years.

The company is founder-run, which can be a plus in investing. Cresco Labs has a price to sales ratio of 0.55. BUY

Cronos Group (CRON) is mainly a foreign operator with exposure to Canada, Germany, Australia and Israel.

Cronos has respectable brand strength in Canada. It sells gummies, infused pre-rolls and vapes under the Spinach, Blue-Raspberry Watermelon and Tropical Diesel brands. Spinach products command 15.3% market share in the Canadian edibles category, and 19.8% share in gummies, according to Hifyre.

In Israel, Cronos sells dried flower, pre-rolls and cannabis oils in the medical market. The company has a partnership with Cansativa Group which allows Cronos to sell its Peace Naturals brand in Germany, where the cannabis market should grow dramatically over the next several years because of liberalization of restrictions on sales. Cronos has a 10% stake in Cronos Australia, a publicly traded company.

Cronos has $855 million in cash, or about $2.24 per share, against minimal debt of $2.26 million. Some of that cash could be deployed in acquisitions, possibly to expand in the U.S. adult-use market.

Cronos trades at 0.75 times book value. BUY

Curaleaf (CURLF), based in Massachusetts, was the industry leader last year. It operates 145 dispensaries and several grow sites in 17 states and its European operations. It has one of the strongest brand portfolios in the U.S. led by Select, the number one selling vape brand in its markets. Here are three factors that support growth.

1. Curaleaf is an R&D powerhouse. A team of scientists is currently developing about 180 products.

2. Like many of the names in our portfolio, Curaleaf is well positioned to benefit from the opening up of rec-use sales in New York, Ohio, Florida, and Pennsylvania near term.

3. Curaleaf will benefit from progress on liberalization of cannabis laws in Germany and elsewhere in Europe. It has a majority stake in Germany’s Four 20 Pharma, a licensed producer and distributor of medical cannabis that has more than 15%-20% market share in Germany. Curaleaf International is the largest vertically integrated cannabis company in Europe. It has a lot of room to expand production, and it boasts import and distribution in the U.K., Germany, Italy, Switzerland, and Portugal. Recreational use legalization in Germany is advancing, and it could open the floodgates to further legalization throughout Europe. Curaleaf has a 50% market share in the U.K.

The company is founder-run, which can be a plus in investing. Curaleaf has a price/sales ratio of 1.07. BUY

AdvisorShares Pure U.S. Cannabis ETF (MSOS) This exchange-traded fund (ETF) has large exposure to most of our portfolio names so it may seem redundant. However, I want to put it on your radar as a liquid trading vehicle for getting in and out of the group without having to make a lot of individual stock sales, and as a way to get exposure to many of our names with one purchase. It also gives us diversification beyond our names, to positions like Jushi Holdings (JUSHF) and Innovative Industrial Properties (IIPR), among others. Consider accumulating this ETF on weakness of 2% or more. BUY

AdvisorShares MSOS 2x Daily ETF (MSOX) This is the leveraged version of the ETF MSOS. It theoretically goes up (and down) by twice as much as MSOS, though the relationship does not always hold exactly. Consider accumulating on weakness of 2%-4% or more. Note that leveraged ETFs suffer from some persistent valuation decay because of the cost of the leverage. BUY

ETFMG Alternative Harvest (MJ) This ETF has outsized foreign exposure, which means it could benefit more than other marijuana exchange-traded funds if we see progress on legalization in Germany and Europe. That could happen in the form of draft legislation and decriminalization of recreational use in 2023. “Legalization in Germany could be a tipping point for global expansion,” according to cannabis experts at ETFMG. This would put additional pressure on other European Union members to move forward with legalization. It could also encourage reform of the 1961 U.N. Single Convention on Narcotics which prohibits the cultivation and sale of recreational cannabis. “Such a result would be momentous and would open the doors to a global market,” says ETFMG. Owning this ETF broadens our industry exposure to names outside our portfolio, like Canopy Growth (CGC; WEED.TO), SNDL (SNDL), and GrowGeneration (GRWG), among others. BUY

Green Thumb (GTBIF), based in Chicago, is our portfolio’s largest position. It has been the most profitable multistate operator of all the big ones – a sign of good management.

Green Thumb branded cannabis products include &Shine, Beboe, Dogwalkers, Doctor Solomon’s, Good Green, incredibles and RYTHM. The company operates a chain of national retail cannabis stores called RISE. Green Thumb has 91 dispensaries across fourteen states. Green Thumb continued to strategically position itself in markets that look poised to expand to recreational uses sales, like Florida and Pennsylvania.

Founder Ben Kovler is chairman and CEO. Research shows that founder-run companies often outperform. Kovler has a 26% stake in the business and holds nearly 59% of voting power. Green Thumb trades at a price to sales ratio of 1.93. BUY

Organigram (OGI) holds the #2 position among Canadian licensed producers. It also sells high-margin flower in Israel, Australia and Germany. Germany should see robust growth over the next few years as it loosens rules on medical cannabis use. The CEO has alluded to “creative ways” to get into the U.S. cannabis market, but does not offer details.

The company has the #1 market share position in hash globally driven by popular products like Tremblant, Holy Mountain and SHRED. It has the #1 market share position in gummies.

British American Tobacco (BTI) is a big investor in Organigram, an endorsement of its potential. The two companies collaborate to develop cannabis products. The price to sales ratio is 1.1. BUY

Tilray Brands (TLRY) is a cannabis and consumer packaged goods company with one of the biggest global footprints in the industry. CEO Irwin Simon founded The Hain Celestial Group, a natural food company, which is in the business of brand development. This is a key factor for cannabis companies, too. So, the Hain Celestial experience may bode well for shareholders.

Tilray is a big recreational and medicinal cannabis supplier in Canada. It is ranked #1 there by sales for cannabis flower, oils, concentrates, and THC beverages; #2 in pre-rolls, #4 in vape, and among the top 10 in all other categories. It also offers medical cannabis in 20 countries on five continents through its subsidiaries and agreements with pharma distributors. It has operations in Canada, the United States, Europe, Australia and Latin America. It sells craft beer and CBD products in the United States.

Tilray seems like a good play on expected legalization of recreational use in Europe over the next few years, because it has been making significant investments there. It has a medicinal marijuana distribution network in Germany. It has production facilities in Portugal and Germany, the largest medical cannabis market in Europe.

Tilray sells hemp food products through its Fresh Hemp Foods division, and it has a craft alcohol business called SW Brewing, the tenth-largest craft brewery in the United States. The price to sales ratio is 1.38. BUY

Trulieve (TCNNF) has long been the biggest medicinal marijuana vendor in Florida, where it has 50% market share. It has over 190 dispensaries and two thirds are in Florida. Cannabis activists are trying to get recreational use on the Florida ballot in November 2024. A win would be huge for Trulieve. Approval could make Florida the largest legal U.S. cannabis market with 22 million residents and 138 million tourists a year.

Meanwhile, Trulieve has been expanding across the country. It is diversifying its presence into Pennsylvania, Maryland, Georgia, Ohio and Massachusetts, among other states.

The company reports $320 million in cash against $795 million in debt. “U.S. cannabis has significant white space ahead, with many states yet to implement medical or adult-use programs, and the growing appetite for substantive federal reform,” says CEO Kim Rivers. It has a price to sales ratio of .98. BUY

Verano (VRNOF), based in Chicago, is one of the top five publicly traded multi-state operators in the U.S. by sales. Verano has nearly 140 dispensaries and 14 production facilities in 13 states. One of the most attractive qualities of this company is that it has a big presence in high-growth markets like New Jersey, Illinois, Florida and Connecticut, and states that may soon legalize recreational like Florida and Pennsylvania. The company’s strategy has been to position with medical dispensaries in states most likely to soon go recreational.

The company’s portfolio of brands includes Encore, Avexia, MÜV and its signature Verano line of product. To capitalize on the consumer’s trading down to value brands, Verano moved up the rollout of a new budget line called Savvy last year. It operates dispensary concepts called Zen Leaf and MÜV. It also has a licensing agreement with Mike Tyson’s Tyson 2.0 cannabis company.

The company reports cash of $194 million against debt of $541 million.

Verano is founder-run, which can be a plus in investing. Verano has a price to sales ratio of .54. BUY

The next Cabot Cannabis Investor Issue will be published on January 29, 2025.

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