The Pros and Cons of Cannabis Stocks for the Coming Months

The Pros and Cons of Pot Stocks for the Coming Months

Cannabis stocks soared to highs in early 2021 as the market expected the Biden Administration, House of Representatives, and Senate to support legislation to legalize cannabis on a federal level. When cannabis took a backseat to other initiatives, the cannabis stocks sunk, continuing to make lower highs and lower lows in 2021 and throughout the first seven months of 2022.

In 2022, thirty-seven US states have legalized marijuana for medicinal purposes, and nineteen have approved recreational use, supporting the burgeoning cannabis industry. However, federal legalization remains a lynchpin for success as the gulf between federal and state laws creates roadblocks, preventing traditional bank financing and consumer services. Dispensaries in states that have legalized cannabis can only collect cash or charge customers’ debit cards, and credit cards remain taboo because of federal regulation. The US government continues to consider marijuana a Schedule I drug with a high potential for abuse and little medical benefit. Transporting cannabis across some state lines as it moves from producers to consumers can carry severe trafficking penalties.

Meanwhile, the cannabis stocks have gone up in smoke since the early 2021 highs as investors have become frustrated with the lack of government initiatives to legalize cannabis.

The trend is ugly- Cannabis stocks have made lower highs and lower lows

• Curaleaf (CURLF), the cannabis company with the top market cap, fell from $18.38 in February 2021 to $6.054 per share on August 12, or 67%.
• Tilray (TLRY) dropped from $67.00 in February 2021 to $4.03 per share on August 12. The 94% drop was dramatic, but the stock reached a $300 per share high in September 2018.
• The diversified AdvisorShares Pure Cannabis ETF product (YOLO) that holds shares in a portfolio of cannabis companies fell from $31.87 in February 2021 to $5.78 per share or 81.9% at the end of last week.
• The trend in cannabis stocks remains bearish as market caps have gone up in smoke.

The hunger is bullish- A compelling revenue channel for the US government that is starved for tax receipts

• Staggering deficits caused by the global pandemic and US government spending have increased the need for new tax revenue verticals.
• The slimmed-down Build Back Better legislation, renamed the Inflation Reduction Act, increases corporate taxes and taxes on annual incomes over $400,000.
• As of August 12, 2022, the US national debt is above $30.6 trillion. Federal taxes on marijuana would create a new revenue vertical for the US government.

Political wrangling- Washington DC lobbyists may have ulterior motives

• Washington DC lobbyists exchange funding and political support for elected officials for votes on critical legislation.
• In 2021, the tobacco industry had 236 federal registered lobbyists, 78.4% of whom were former government employees.
• Tobacco companies will likely look to enter the marijuana business when federal legislation legalizes cannabis.
• Weakening the burgeoning cannabis companies favors the tobacco industry and its potential expansion.

The eventual winners- Tobacco giants likely want to dominate the burgeoning industry

• Two of the three leading publicly traded tobacco companies, Philip Morris (PM) and Altria Group (MO), have combined market caps that are 50% of the sixteen industry leaders.
• PM and MO’s combined market cap is over $235 billion.
• At $99.24 per share, PM pays shareholders a $5.00 or 5% dividend. At $45.15, MO’s dividend of $3.60 translated to an 8% yield.
• PM and MO are cash-rich companies with plenty of resources for growth acquisitions. Once legalized, cannabis is a natural and synergistic fit.

The opportunity- Low market caps create attractive take-over candidates

• Curaleaf (CURLF) has a market cap of $4.29 billion, and is a leader in the cannabis sector.
• Tilray’s (TLRY) market cap was at the $2.33 billion level.
• The leading cannabis companies are compelling take-over candidates that could create accretive returns for PM, MO, or other cash-rich companies.
• Takeovers would supply know-how, operating dispensaries, cultivation, and a customer base. The well-capitalized companies would create economies of scale for the industry.
• Legalization is critical for the survival and growth of the burgeoning industry that will likely become a segment of an existing and well-established market sector. Expect M&A activity.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!