Why The Time To Invest In U.S. Cannabis Stocks Is Right Now

The U.S. cannabis market presents a significantly skewed risk-reward opportunity, particularly within the realm of multi-state operators (MSOs). As explained by author Chris Ingrassia in Todd Harrison's “Cannabis Confidential” newsletter, the recent price actions have left many investors bewildered, especially in the wake of the proposed rescheduling of cannabis under the DEA’s Controlled Substances Act from Schedule I to Schedule III.

U.S. MSOs: Evaluating The Investment Thesis

Why Add U.S. MSOs To Your Investment Portfolio?

Ingrassia goes over several key questions investors should ask themselves when evaluating U.S. MSOs. The first and foremost is whether these entities, despite the volatile price action, merit inclusion in an investable universe based on current investment criteria. Given the expansive growth potential, the answer leans towards yes.

Public sentiment towards cannabis has shifted dramatically, with 70% of Americans now in favor of legalization, a significant rise from approximately 45% in 2010. This growing acceptance is mirrored in the increasing number of states legalizing both medical and adult-use cannabis, fostering a rapidly expanding market. This shift is not only due to the plant's benefits but also the relatively low risks it poses.

Well-established U.S. MSOs, such as Green Thumb Industries GTBIF, Curaleaf CURLF, Trulieve TCNNF, Verano VRNOF and Cresco CRLBF – all part of the AdvisorShares Pure US Cannabis ETF MSOS, exhibit robust operating efficiency and business resiliency, translating into repeat revenues and earnings stability. These companies are positioned for long-term growth, supported by a massive and growing total addressable market (TAM), Ingrassia says.

Investment Criteria: Fundamentals And Valuations

Ingrassia suggests that despite the tumultuous market conditions, the fundamental growth story of U.S. MSOs remains compelling. These companies are primarily organically grown, operationally efficient and managed by competent teams. They continue to increase their geographic footprint, expand product mixes and implement innovative marketing campaigns.

What’s more, the consumer shift towards cannabis is notable. Many people are replacing prescription medications for anxiety, depression, sleep and pain with cannabis. Additionally, cannabis is making inroads into the alcoholic beverage market, as many consumers prefer its effects without the negative health impacts of alcohol.

Overcoming Industry Challenges

Despite the promising outlook, the cannabis industry faces significant challenges. The primary issues include the inability to list on major U.S. exchanges, custody restrictions by large custodian banks, burdensome taxation under IRS code 280E and competition from the illicit market.

The Secure and Fair Enforcement Regulation (SAFER) Banking Act could address many of these challenges by allowing federally regulated financial institutions to serve state-sanctioned marijuana businesses. Additionally, rescheduling cannabis to Schedule III would eliminate the 280E tax burden, significantly improving profitability.

Recent Price Action and Market Volatility

The OTC market's low trading volume and wide bid-ask spreads result in significant volatility for cannabis stocks. This environment attracts quantitative traders who exploit market inefficiencies, further amplifying price swings. However, Ingrassia notes that this will likely continue until MSOs can uplist to major exchanges, improving liquidity and access to institutional investors.

Catalysts For Future Growth

In Ingrassia’s view, several potential catalysts could drive significant growth in the cannabis industry. The rescheduling proposal by President Biden, the potential passage of the SAFER Banking Act and increased M&A activity as regulations ease are all poised to create a more favorable environment for cannabis companies. Additionally, further state-level legalization, particularly in states like Florida, Hawaii, New Hampshire and Pennsylvania will continue to expand the market.

Therefore, Ingrassia advises investors to consider the long-term opportunity in the cannabis sector. Despite the current frustrations and challenges, the industry is poised for substantial growth, making it a potentially lucrative investment for those willing to look beyond the present volatility.

Check out “Cannabis Confidential” for more analyses of key cannabis stocks.

Cover image: AI