Cannabis Stocks Are Still in a Bear Market

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 no longer send these by email as we did in the past, but we post this and all of the newsletters on our website here.

Friends,

Stocks in general are melting down today due to the news yesterday about tariffs that was shared after the market closed yesterday. Yesterday, the Global Cannabis Stock Index closed at 5.07, down 26.5% year-to-date. The bear market in cannabis stocks is more than 4 years old:

I had warmed up to the beaten-up sector last year due to the likely rescheduling that would have wiped out 280E taxation. This onerous tax that was implemented under President Reagan in 1982, and we called it out as the biggest challenge for the industry in late 2022.

At this time, rescheduling appears to not be happening, and it appears that 280E taxation will live on. Clearly, many American cannabis companies will not. Innovative Industrial Properties disclosed a big problem with PharmaCann in December that had been resolved, but it became a problem again quickly after the resolution. This week, the stock has plunged again due to the failure of three additional tenants to pay rents on their cannabis properties. I think that IIPR is a well managed company, and that the big dip in December was a buying opportunity, but I have not added it to my model portfolio at 420 Investor. I shared in this newsletter a very negative view on its cannabis REIT peers on the last day of the year, and they have all declined significantly since then.

I am normally contrarian, and this seems like a dream come true for investors who like to be contrarian. Cannabis reform appears dead, and the legal cannabis industry seems to be suffering from weak demand from consumers. Cannabis stocks are trading at very cheap levels. I have even warmed up to some that I was previously very negative about their prospects, like Tilray Brands, which reports its fiscal Q3 next week. Cannabis-focused mutual funds have been closing, and there appear to be few buyers of cannabis stocks. Even some of the cannabis business media has been closing.

This newsletter was very negative on cannabis stocks when a lot of folks were quite optimistic in 2023. While we warned that rescheduling was not a done deal, we did point to a potential improvement in cannabis stocks beginning in early June. Our tone more recently has been cautious again, though clearly we do not have a crystal ball.

I have been running 420 Investor since 2013, and I have always warned my subscribers that cannabis stocks are quite volatile. I share a model portfolio that is designed to do better than the cannabis stock universe, but I am very clear that the performance can still entail losing money if cannabis stocks are going down. Going down less than peers is still declining in price, which is not good for most investors.

As we regularly share, there is more to the cannabis market than just MSOs. My model portfolio at 420 Investor has positions in three Canadian LPs that represent 52% of the portfolio, which is much larger than the exposure of the Global Cannabis Stock Index. I see less risk and some opportunities too. They can operate in legal markets outside of Canada, and perhaps Canada will lower the cultivation taxes there. Of course, while the legality of hemp-derived THC in the U.S. is under attack, several LPs have entered the THC beverage market in the U.S. The Canadian LPs seem cheaply priced relative to projected earnings as well as relative to tangible book value. Investors can find ancillary companies that have high net cash that trade below tangible book value too.

So, cannabis stocks have posted a new all-time low. Despite being attractively priced, the stocks may keep declining. Maybe they will do better, but I am not seeing any signs of that happening soon.

Sincerely,

Alan

New Cannabis Ventures publishes curated articles as well as exclusive news. Here is what we published this past week:

Exclusives

Cannabis Sales Cratered in March

Cannabis Stocks Suffer Large Declines Again in March

Illinois Cannabis Sales Slip Again in February

Looking at the Cannabis Meltdown by Sub-Sector

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