Back on August 28 and September 3, I suggested buying cannabis stocks in the severe weakness that put a lot of cannabis investors in a deeply distressed state. I cited the excessive negativity and the potential for a bullish update from presidential candidate Donald Trump on his cannabis policy.
On September 9 we got the Trump update, and it was very bullish for the sector. Cannabis stocks moved up sharply.
Let’s use two suggested exchange-traded funds as proxies for the group, AdvisorShares Pure U.S. Cannabis (MSOS) and AdvisorShares MSOS 2X Daily (MSOX).
On August 28 and September 3, MSOS traded in the 6.04 to 6.69 range. Using the midpoint of 6.36, MSOS advanced 14% to 7.24. It then settled in around 6.90 for gains of 8%.
On August 28 and September 3, MSOX traded in the 1.70 to 2 range. Using the midpoint of 1.85, MSOX advanced 30% on the Trump news to trade up to 2.40. It then settled in around 2.20 for gains of 19%.
Short-term gains of 8% to 19% are nice, but I suggest holding and adding on weakness.
The reason: The Trump news is very bullish for cannabis. That’s because it means that now both presidential candidates favor significant cannabis reform at the federal level.
The Key Reforms
We already knew that Vice President Kamila Harris supports key reforms like rescheduling. The reason rescheduling would be bullish is that companies currently cannot deduct operating expenses against the sales of a Schedule I drug, which is where cannabis is listed under the Controlled Substances Act. A move to Schedule III would neutralize the IRS rule (280E) barring the deduction of operating expenses against Schedule I substance sales. This would drop huge amounts of cash flow onto cannabis company financial statements.
Harris also supports banking reform which would allow banks to serve cannabis companies (called SAFE banking), and decriminalization of possession of small amounts for personal use. I assume she also supports recreational use legalization in Florida to be voted on this election (called Amendment 3).
Her vice-presidential candidate, Minnesota Gov. Tim Walz legalized cannabis as governor of Minnesota, so we know where he stands on all of these policy issues.
In Trump’s policy update Monday, posted at his media company Truth Social, he made it clear he supports all four of these key reforms: Rescheduling, banking reform, decriminalization and legal recreational use in Florida.
“I believe it is time to end needless arrests and incarcerations of adults for small amounts of marijuana for personal use,” said Trump in his social media update. “We must also implement smart regulations, while providing access for adults, to safe, tested product. As a Floridian, I will be voting YES on Amendment 3 this November. As President, we will continue to focus on research to unlock the medical uses of marijuana to a Schedule 3 drug, and work with Congress to pass common sense laws, including safe banking for state authorized companies, and supporting states’ rights to pass marijuana laws, like in Florida, that work so well for their citizens.”
A few days earlier in an interview with the popular podcaster Lex Fridman, Trump praised cannabis. “Medical marijuana has been amazing. I’ve had friends, and I’ve had doctors telling me that it’s been absolutely amazing,” he said.
Of course, progress on federal-level reform will depend on which parties control the Senate and the House, and the key cannabis-related committees in Congress. However, the fact that the presidential candidates both support significant change is quite bullish for the group, medium term.
It’s about time because the majority of voters in both parties support cannabis reform, according to various polls. I don’t encourage cannabis use, but if you believe that individual liberties are core to the U.S. system and economic engine, cannabis reform seems logical. This is what the majority now thinks, too.
It’s obvious what’s going on here. Polls show that voters in swing states widely support cannabis reform. Obviously, internal polling by the Trump campaign confirms substantial, widespread cannabis reform support, especially in the swing states, or he would have not announced his favorable cannabis policy. As a general rule, internal polling by campaigns is more accurate than the polls you read about in the media, though they are not terrible.
Florida
The Trump news is particularly significant for Florida, where voters will weigh in on recreational-use legalization in a referendum called Amendment 3, this November. Approval will vastly improve the prospects, and boost the stock prices, of cannabis companies with large exposure to Florida. The big ones are part of my cannabis portfolio (see below).
The reason the Trump support is so important: Various polls before the Trump endorsement consistently showed it would be a close vote. The referendum needs 60% support to pass. Poll results showed support hovers a bit below and above that threshold.
Since holdouts are more likely to be on the right, the Trump endorsement of the amendment will increase the odds of Amendment 3 approval considerably. So will recent support from conservative Roger Stone, and an association called Florida Young Republicans in the state.
By percentage of stores in Florida, our Ayr Wellness (AYRWF), Trulieve (TCNNF), Verano (VRNOF), Cresco Labs (CRLBF) and Curaleaf (CURLF) have the biggest presence in Florida, in that order. The percentage of stores in Florida for this group ranges from 40% for Curaleaf, to 70% for Ayr. I’d expect these stocks to see a big bounce if Florida’s Amendment 3 is approved, which is what I expect.
What to Do Now
Because the leadership of both of the largest political parties now uniformly supports cannabis reform, I suggest considering purchases of cannabis stocks on any weakness that happens from here. Consider taking both trading positions and multiyear positions now.
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.
* A federal appeals court in Texas has ruled that charging a woman for owning a firearm as a cannabis user is unconstitutional. The case, U.S. v. Connelly, challenges the federal government’s prohibition on gun ownership by users of illegal drugs, in this case cannabis.
“Our history and tradition may support some limits on a presently intoxicated person’s right to carry a weapon,” said the Fifth Circuit court. “But they do not support disarming a sober person based solely on past substance usage.”
The court challenged Department of Justice (DOJ) claims that cannabis users are inherently more dangerous. “Repeat marijuana users, like repeat alcohol users, are of sound mind upon regaining sobriety,” said the court.
“Laws designed to disarm the severely mentally ill do not justify depriving those of sound mind of their Second Amendment rights,” the court wrote. “Just as there is no historical justification for disarming citizens of sound mind there is no historical justification for disarming a sober citizen not presently under an impairing influence.” No federal law limits the Second Amendment rights of people who occasionally drink alcohol, added the court.
* Cannabis activists in Arkansas have submitted additional signatures supporting a cannabis referendum after part of a prior batch of signatures was disqualified. The referendum would expand the state’s medical cannabis program by allowing healthcare professionals to offer recommendations to patients for any condition. It would also lower the cost of medical cannabis cards and allow users to grow their own supply. The referendum would also add nurse practitioners, physician’s assistants, pharmacists and osteopathic doctors to the list of people who can make medical-use cannabis recommendations.
* Cannabis is heating up as a presidential campaign issue, and this may be good for investors in the space.
Vice President Kamala Harris’ campaign staff recently accused candidate Donald Trump of “brazen flip flops” on cannabis, following his announcement that he supports four major reform efforts.
“Trump now suggests he is for legalizing marijuana, but as President, his own Justice Department cracked down on marijuana offenses,” says a campaign memo. “Let’s be blunt,” says the memo. “Trump is just making stuff up. And he hopes we will all memory hole his actual record and only pay attention to his shallow words.”
Trump recently came out in support of four major cannabis reform efforts: Rescheduling, reform that would allow banks to serve cannabis companies, decriminalization, and the legalization of recreational use in Florida.
Robert F. Kennedy, Jr., now aligned with Trump, has recently criticized Harris’ record of prosecuting people for cannabis possession.
The key takeaway for investors: If Trump and Harris continue to compete over who has a more favorable cannabis reform plan, it will attract investors to the space short term possibly bidding up stocks. It would increase the odds of actual follow-through on cannabis reform, down the road.
* A recent poll finds that voters in three key swing states, Pennsylvania, Michigan and Wisconsin, support cannabis reform. The poll found 84% of participants favor medical cannabis legalization, and 62% favor recreational-use legalization.
Ragnar Research, which conducted the poll, concluded that voters in swing states “are overwhelmingly in support of responsible modernization of American marijuana policy.” They said respondents think reform is a way to expand healthcare options and reduce the income of drug cartels.
The poll also suggests that 65% of Florida voters support a November referendum legalizing recreational use in the state. The referendum requires 60% support for approval. The poll was conducted prior to presidential candidate Donald Trump’s announcement that he will vote in favor of the referendum. Trump’s endorsement will presumably increase support for the referendum among conservatives, who have been more reluctant than voters on the left to support legalization of rec-use.
* Nebraska has agreed to put referenda before voters that would legalize medical cannabis and establish industry regulations. The referenda were set up by Nebraskans for Medical Marijuana. Florida, North Dakota and South Dakota also have cannabis legalization measures on the November ballot.
* A Cherokee tribe has launched recreational cannabis sales in North Carolina, a prohibition state. The Eastern Band of Cherokee Indians sells cannabis through the Great Smoky Cannabis Company, on tribal property called Qualla Boundary. While sales are legal on tribal land, possession remains illegal in the state.
* California lawmakers have approved a bill that would allow Amsterdam-style cannabis cafes that can sell food and nonalcoholic beverages and host live performances. Some California stores offer consumption lounges, but they can only offer prepackaged snacks and drinks. Bill sponsors argued cafes would help stores compete against illicit cannabis sellers. California Gov. Gavin Newsom vetoed a similar bill last year, citing the risks of second-hand smoke to employees. The new bill suggests stricter ventilation standards and respiratory masks for employees could mitigate the problem.
* Ohio stores sold an impressive $44 million worth of recreational-use cannabis in August. Rec-use sales began on August 6. For context, Illinois sold $39 million in rec-use cannabis in its first full month of sales in January 2020. The Ohio sales tally only covers three weeks.
* Cannabis advocates in Wisconsin have ramped up efforts to get medical cannabis approved. The Indigenous Cannabis Industry Association and the Wisconsin Tribal Task Force on Cannabis recently launched a campaign called Wisconsin Wellness to convince lawmakers to approve medical cannabis for ailments like post-traumatic stress disorder, anxiety and chronic pain. Wisconsin does not permit referenda. Neighboring Illinois and Michigan have legalized cannabis.
* A bipartisan majority of Texas voters support cannabis decriminalizing. In the poll conducted by the University of Texas/Texas Politics Project, 68% of respondents said they support the change. Among Democrats, 81% favor decriminalization, and 59% of Republicans support it. Voters in several Texas cities will weigh in on cannabis decriminalization referenda this November, including Dallas, Bastrop and Lockhart. Austin, Denton, Elgin, Harker Heights, Killeen and San Marcos have already approved decriminalization. Gov. Greg Abbott (R) opposes the tactic, arguing that local governments do not have the authority to override state law.
Company News
AYR Wellness (AYRWF)
AYR Wellness has won approval to grow, produce and sell medical cannabis in Virginia. Medical use is permitted in Virginia and possession of small amounts for personal use is legal. But recreational-use sales are barred. Positioning in medical-use states that may expand to recreational use is a core strategy I favor in cannabis investing.
Curaleaf (CURLF)
Curaleaf has expanded its JAMS line of edibles with a product line called JAMS Remix. The company says the new line offers tailored blends of THC, THCV and cannabinoids with ingredients that accelerate the impact of the edibles.
Organigram (OGI)
Organigram has received another big cash infusion from partner British American Tobacco (BTI). The $30.8 million private placement is part of an ongoing BAT plan to invest $92 million in Organigram through its BT DE Investments subsidiary. The third and final phase of this investment plan will kick in next February.
Organigram’s Jupiter Strategic Investment Pool is using the funds to expand internationally and develop new products.
So far, Jupiter has invested in Open Book Extracts, a North Carolina company that makes hemp-based cannabis products. The investment gives Canada-based Organigram access to the U.S. market.
Organigram also recently invested in a medical cannabis company called Sanity Group, to gain access to the fast-growing German cannabis market. Sanity has a 10% share of the German medical-use market. Germany recently removed cannabis from its narcotics lists. This is boosting legal cannabis sales dramatically because it makes it easier for doctors to recommend cannabis for medical use. Sanity is also making forays into the Swiss medical-use market.
Trulieve (TCNNF)
Trulieve, already the largest medical-use cannabis company in Florida, continues to expand aggressively in the Sunshine State. It recently opened four new stores in Cocoa, Miramar Beach, Niceville, and Tampa. It will also open a new store in Clearwater on September 13.
The openings are part of a strategy of building a presence ahead of Florida’s anticipated expansion into legal recreational-use sales. Voters will weigh in on the issue via a referendum in November. Polls suggest the vote will be close. But approval seems more likely now that presidential candidate Donald Trump says he supports the change. The referendum is called Amendment 3.
Trulieve also recently opened a relocated store in Menlo Park, AZ.
Tilray (TLRY)
A recently published study funded by Tilray concluded that medical cannabis improves pain scores, sleep quality, and quality of life for fibromyalgia patients. The study, called Treatment in Pain Management and Other Fibromyalgia-Associated Symptoms: A Case Series, was funded in part by Tilray’s Tilray Medical division.
Tilray also recently closed on a deal to buy the craft breweries Hop Valley Brewing Company, Terrapin Beer, and Revolver Brewing, from Molson Coors Beverage (TAP). The acquisition strengthens Tilray’s position in the U.S. craft beer market. It is the fifth-largest craft brewer in the country.
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