In this week’s edition of the New Cannabis Ventures newsletter, Alan Brochstein, CFA discusses the increased risk associated with investing in American cannabis stocks. Following the news of a potential rescheduling of cannabis from Schedule 1 to Schedule 3, which could end the industry’s negative taxation, investors rushed into the market. However, Brochstein warns that if the DEA decides to go with Schedule 2 instead, the rally could be short-lived, causing stocks to plummet. He suggests considering Canadian LPs and ancillary companies as alternatives with potential returns and less risk. While there is optimism for the industry, there are still uncertainties that investors need to be mindful of.
Factors Influencing Risk
When it comes to investing in the cannabis industry, there are several factors that can influence the level of risk involved. Understanding these factors can help you make informed decisions and manage your investments more effectively.
Change in cannabis scheduling
One factor that can greatly impact the risk of investing in the cannabis industry is the potential change in the scheduling of cannabis. Currently, cannabis is classified as a Schedule 1 substance by the Drug Enforcement Administration (DEA), which means it is considered to have a high potential for abuse and no accepted medical use.
However, there have been discussions and efforts to reschedule cannabis to a lower schedule, such as Schedule 3. This change could have significant implications for the industry, as it would remove some of the legal barriers and restrictions currently imposed on cannabis companies. It could also open up new opportunities for research and development, leading to further growth in the industry.
Negative impact of taxation
Another factor that can increase the risk of investing in the cannabis industry is the negative impact of taxation. Currently, cannabis companies in the United States are subject to a highly burdensome tax code provision known as 280E. This provision prevents cannabis companies from deducting ordinary business expenses, resulting in significantly higher effective tax rates compared to other industries.
If this provision is not repealed or modified, it could continue to place a heavy financial burden on cannabis companies and limit their profitability. This, in turn, could make investing in these companies riskier and potentially less lucrative.
Rally in stock prices
The recent rally in stock prices within the cannabis industry has also introduced new risks for investors. Following the news of the potential rescheduling of cannabis and the resulting optimism in the market, many cannabis stocks experienced significant increases in their prices.
While this rally may seem promising, it also raises concerns about potential market overvaluation and a subsequent market correction. If the market experiences a correction, investors who bought in during the rally could face significant losses. It is important to carefully assess the current valuations of cannabis stocks and consider the potential for a market correction before making investment decisions.
Potential need to raise capital
Lastly, the potential need for cannabis companies to raise capital can contribute to the level of risk associated with investing in the industry. Despite the positive developments and increased investor interest, many cannabis companies still face significant financial challenges.
Cannabis companies often require substantial amounts of capital to fund their operations, expansion, and research and development efforts. If these companies are unable to secure sufficient capital or if they are forced to raise capital through dilutive means, such as issuing additional shares, it can negatively impact their financial health and the value of their stock.
It is important for investors to consider the financial stability and capital needs of cannabis companies before investing, as this can greatly impact the potential for long-term success and profitability.
Rise in Stock Prices
The recent news regarding the potential rescheduling of cannabis has had a significant impact on the stock prices of many cannabis companies. Since the news hit, several major cannabis stocks have experienced substantial increases in their prices.
For example, looking at the largest multi-state operators (MSOs), we can see that their stock prices have soared since August 29th. Companies like Curaleaf, Green Thumb Industries, and Trulieve saw significant increases in their stock prices, with average returns of 24.5%.
However, it is important to note that while some stocks have experienced significant gains, others have not performed as well. For example, Trulieve is still down for the year.
When analyzing these stock prices, it can also be helpful to consider additional metrics, such as the price-to-tangible-book ratio. This ratio can provide insight into the potential downside risk if things do not play out as expected. Among the largest MSOs, Green Thumb Industries (GTI) has the best balance sheet but trades at 4.8 times tangible book value, indicating a potentially higher level of risk compared to other MSOs.
Balance Sheet Analysis
Analyzing the balance sheets of the largest multi-state operators (MSOs) in the cannabis industry can provide valuable insights for investors. Key metrics to consider include market caps, net debt, current ratios, and tangible book values.
Market caps provide an indication of the market value of a company, which can be used to assess its size and overall financial standing. Net debt, on the other hand, represents the total debt of a company minus its cash and cash equivalents, providing an insight into its debt obligations.
The current ratio, calculated by dividing current assets by current liabilities, can help assess a company’s ability to meet its short-term obligations. A higher current ratio indicates a stronger financial position.
Tangible book value is another important metric to consider when analyzing the balance sheets of cannabis companies. It reflects the net worth of a company, adjusted for any dilutive securities. Companies with higher tangible book values may be considered more financially stable.
By analyzing these metrics for the largest MSOs, investors can gain a better understanding of their financial health and make more informed investment decisions.
Other Opportunities
While investing in American cannabis operators may have attracted significant attention, there are also other opportunities worth considering in the cannabis industry. These opportunities can potentially offer lower risk compared to American cannabis operators and provide investors with diversification benefits.
Canadian LPs
Canadian licensed producers (LPs) represent a promising sector within the cannabis industry. These companies benefit from a more favorable regulatory environment, with significantly fewer legal barriers compared to their American counterparts.
Investing in Canadian LPs can provide exposure to a market with strong growth potential and greater regulatory certainty. Additionally, many Canadian LPs have established partnerships and international expansion plans, expanding their potential market reach.
Ancillary companies
Ancillary companies, which provide products and services to the cannabis industry without directly cultivating, producing, or distributing cannabis, also present interesting investment opportunities. These companies can include technology providers, packaging companies, consulting firms, and more.
By investing in ancillary companies, investors can take advantage of the growth in the cannabis industry without being exposed to the same level of legal and regulatory risks as companies directly involved in cannabis cultivation and distribution.
Investing in a diversified portfolio that includes Canadian LPs and ancillary companies can help mitigate some of the risks associated with investing solely in American cannabis operators.
Uncertainty of Future Market
While recent developments have generated optimism in the cannabis industry, there are still several uncertainties and risks that investors should be aware of.
Rescheduling of cannabis not guaranteed
Although there have been discussions and efforts to reschedule cannabis to a lower schedule, it is important to note that this change is not guaranteed. The DEA ultimately has the authority to determine the scheduling of cannabis, and their decision may not align with expectations or desires.
If cannabis is not rescheduled, it could potentially hinder the growth and development of the industry, as legal barriers and restrictions would remain in place.
Impact of 280E not ending
Another important uncertainty involves the potential end of 280E, the tax code provision that disproportionately affects cannabis companies. Despite the positive developments and potential for cannabis rescheduling, the repeal or modification of 280E is not guaranteed.
If 280E is not repealed or modified, it will continue to place a significant financial burden on cannabis companies and limit their profitability. This can negatively impact the value of their stock and the viability of their operations.
Potential need for capital raising
Even if positive developments occur, such as cannabis rescheduling and the end of 280E, there is still the potential need for cannabis companies to raise capital. The cannabis industry requires substantial amounts of capital to fund ongoing operations, expansion plans, and research and development efforts.
If companies are unable to secure sufficient capital or if they are forced to raise capital through dilutive means, it can impact their financial health and the value of their stock. Investors should consider the potential need for capital raising when assessing the long-term prospects and potential risks of investing in the cannabis industry.
Stock Indices
Monitoring stock indices can provide valuable insights for investors interested in the cannabis industry. Here are some key cannabis stock indices to consider:
Global Cannabis Stock Index
The Global Cannabis Stock Index tracks the performance of publicly traded cannabis companies from around the world. It provides a comprehensive overview of the overall performance and trends in the global cannabis industry.
American Cannabis Operator Index
The American Cannabis Operator Index focuses specifically on publicly traded cannabis companies operating in the United States. This index provides insight into the performance of American cannabis operators and can help investors assess the overall health of the industry in the country.
Ancillary Cannabis Index
The Ancillary Cannabis Index tracks the performance of publicly traded companies that provide products and services to the cannabis industry without directly cultivating or distributing cannabis. This index can provide insights into the performance and trends of ancillary companies in the industry.
Canadian Cannabis LP Index
The Canadian Cannabis LP Index focuses on publicly traded licensed producers (LPs) in Canada. This index provides a snapshot of the performance and trends in the Canadian cannabis industry and can help investors assess the growth potential of Canadian LPs.
By monitoring these stock indices, investors can stay informed about the performance of the cannabis industry as a whole and make more informed investment decisions.
Industry News
Staying up to date with the latest industry news can provide valuable insights for cannabis investors. Here are some notable news updates from the cannabis industry:
July Cannabis Sales Slow
According to recent reports, cannabis sales in July experienced a slowdown compared to previous months. This slowdown may be attributed to various factors, such as seasonal fluctuations or changing consumer preferences. Investors should consider these sales trends when assessing the overall performance of cannabis companies.
Illinois Cannabis Sales Stall in August
Similarly, cannabis sales in Illinois reportedly stalled in August, indicating a potential slowdown in the market. This could be due to various reasons, including market saturation or regulatory challenges. Investors should monitor these sales trends to understand the potential risks and challenges faced by cannabis companies operating in different markets.
Many Cannabis Companies See Stocks Soar in August
Despite the challenges faced by some cannabis companies, many others saw their stocks soar in August. This rally in stock prices can be attributed to positive industry developments, such as the potential rescheduling of cannabis. Investors should carefully analyze these price movements and consider the potential for a market correction in the future.
The Global Cannabis Stock Index Rallies Again in August
The Global Cannabis Stock Index experienced another rally in August, reflecting the overall optimism and investor interest in the cannabis industry. This rally indicates the positive sentiment towards the industry as a whole and may present potential opportunities for investors.
Cannabis Company Financial Reports Don’t Impress
Despite the positive developments in the industry, some cannabis company financial reports have not impressed investors. It is important for investors to carefully analyze the financial performance and prospects of individual companies before making investment decisions.
By staying informed about the latest industry news, investors can better understand the market dynamics, trends, and potential risks associated with investing in the cannabis industry.
New Cannabis Ventures
New Cannabis Ventures provides valuable resources for cannabis investors and enthusiasts. Here is an overview of the platform and its key features:
Overview of New Cannabis Ventures
New Cannabis Ventures is an online platform that offers curated articles, exclusive news, and resources for cannabis investors. The platform aims to provide valuable insights and analysis to help investors stay ahead of the curve and make informed decisions.
Alan Brochstein’s role
Alan Brochstein, CFA, is a prominent figure in the cannabis industry and plays a significant role in the development of New Cannabis Ventures. With his extensive experience and expertise, Alan contributes to content development and strategic alliances on the platform.
Content development and strategic alliances
New Cannabis Ventures focuses on developing high-quality content and establishing strategic alliances within the cannabis industry. The platform curates articles, provides exclusive news, and offers resources to help investors navigate the complex and evolving cannabis market.
Experience and expertise
The team behind New Cannabis Ventures has extensive experience and expertise in the cannabis industry. With a deep understanding of the market dynamics and industry trends, they are able to provide valuable insights and analysis to their audience.
Media sources and publications
New Cannabis Ventures collaborates with various media sources and publications to deliver relevant and up-to-date content to its audience. By partnering with reputable sources, the platform ensures that its readers receive accurate and reliable information.
Newsletter and Subscription
New Cannabis Ventures offers a free weekly newsletter that provides valuable insights and perspectives in the cannabis industry. Here are some key features of the newsletter:
Free weekly newsletter
The New Cannabis Ventures newsletter is available free of charge to subscribers. It is delivered to your inbox each Sunday morning, providing you with a convenient way to stay informed about the latest news and developments in the cannabis industry.
Sunday morning delivery
The newsletter is delivered on Sunday mornings, allowing you to start your week with the latest insights and perspectives in the cannabis industry. This timing ensures that you have the most up-to-date information before making investment decisions or staying informed about industry trends.
Original perspectives and top stories
In addition to providing the top stories from the week, the newsletter also offers original perspectives and analysis from industry experts. This original content helps readers gain a deeper understanding of the cannabis industry and make more informed investment decisions.
Subscription options
New Cannabis Ventures offers various subscription options to cater to different needs. Whether you are an individual investor, a professional in the cannabis industry, or an enthusiast, there is a subscription option that suits your preferences and requirements.
By subscribing to the New Cannabis Ventures newsletter, you can stay informed about the latest news, gain valuable insights, and make more informed investment decisions in the cannabis industry.
NCV Media
NCV Media is the organization behind New Cannabis Ventures, offering a range of services and resources for cannabis investors and enthusiasts. Here is an overview of NCV Media and its key features:
About NCV Media
NCV Media is dedicated to providing high-quality content and resources for cannabis investors. The organization aims to connect the cannabis industry and facilitate its sustainable growth through curated articles, exclusive news, and strategic alliances.
Original content and news curation
NCV Media focuses on developing original content and curating news from reputable sources within the cannabis industry. By providing reliable and insightful information, NCV Media helps investors stay informed and make more informed investment decisions.
Focus on promising companies and influential investors
NCV Media pays close attention to promising companies and influential investors within the cannabis industry. By highlighting their activities and perspectives, the organization provides valuable insights into the market trends, potential opportunities, and influential figures in the industry.
Through its platforms, NCV Media contributes to the growth and development of the cannabis industry by connecting investors and providing them with the resources they need.
In conclusion, understanding the factors influencing risk in the cannabis industry is crucial for investors. Factors such as the potential change in cannabis scheduling, the negative impact of taxation, the rally in stock prices, and the potential need to raise capital can greatly impact investment decisions. It is important to analyze stock prices, balance sheets, and other investment opportunities, such as Canadian LPs and ancillary companies. Additionally, the uncertainty of the future market and monitoring stock indices and industry news can provide valuable insights. New Cannabis Ventures and NCV Media offer resources, newsletters, and original content to help investors stay informed and make more informed investment decisions in the cannabis industry.
