Curaleaf Holdings: The Cleanest Dirty Shirt In The Bin (OTCMKTS:CURLF)

What Went Wrong?

Cannabis stocks and Curaleaf Holdings, Inc. (OTCPK:CURLF) have been generally been a disappointment since Jan. 05, 2021 when I said in Curaleaf Holdings: Get Ready For The New Jersey Stampede

…Curaleaf Holdings, Inc. (OTCPK:CURLF) is poised to be in the proverbial “right place at the right time” with respect to cannabis legalization. The right place is New Jersey and the right time is the next six months. CURLF is already the largest cannabis company in the world, by revenue…

As shown in the chart below CURLF has fallen from over $18 to $3.90 as of January 28, 2022. In January 2021 I thought that the next six months were likely to see a replay of the stock market frenzy that occurred when New Jersey became the only state with legal casinos on the east coast. CURLF is likely to be the focus of attention of that frenzy.

I based that belief on history. The legalization of gambling has many similarities to the legalization of cannabis. In 1976, shares of the predecessor company to Resorts International traded at 67 1/2 cents. By 1978, the year Resorts opened the first casino in Atlantic City, New Jersey, the stock soared to $70. At the start of 1978, when Golden Nugget was a little-known operator of a hotel-casino in Las Vegas, its shares sold at 5 5/8. By August the stock had soared to 44 5/8. (The prices of both Resorts and Golden Nugget are adjusted for 3-for-1 splits in 1978.)

The geographic proximity of New Jersey to Wall Street clearly contributed to the 1978 frenzy. Likewise, I thought that soon the New York Media market, which covers northern New Jersey, would likely be showing long lines of cannabis customers in New Jersey.

It did not work out that way. I definitely underestimated the extent to which some politicians were able to delay and generally botch legalization of recreational cannabis. I naively used the example of Colorado, which had legalized cannabis in 2014. Since then, Colorado has collected $2,018,933,005 in taxes from cannabis through the end of 2021. Colorado has also benefited from increased employment, lower law enforcement costs and reduced opioid overdose deaths as a result of legalization of recreational cannabis. The population of New Jersey is about twice that of Colorado and the population of New York is about four times that of Colorado. The Colorado Amendment 64, which was passed by voters on November 6, 2012, led to recreational legalization in December 2012 and state-licensed retail sales in January 2014. It was not illogical to assume that New Jersey and New York would simply copy what Colorado had already done and the rack in commensurately higher tax revenues. That was not to be the case.

A toxic combination of rear-guard prohibitionists and mostly well meaning, but fuzzy thinking advocates for medical cannabis patients and of social equity, which aims to redress the harm inflicted by the war on drugs and prevent the cannabis market being “controlled” by large corporations, in the way that the alcohol and tobacco industries are, prevented the roll-out of recreational legalization going as well on the east coast states, as it had been in Colorado.

The rear-guard prohibitionists consist of mainly those who could be considered to now have been the losers in the “culture wars”. They have failed in their efforts to prohibit: pornography, birth control, homosexual behavior and same-sex marriage. Cannabis is one of the few “battlegrounds” in the culture wars that has not been mainly lost by the prohibitionists. Today, only the very die-hard prohibitionists still say they favor imprisoning people for simple possession of small amounts of cannabis. Most of the prohibitionists now say they favor decriminalization, rather than legalization of cannabis. However, decriminalization has various negative impacts. As I said in Epidemics, Pandemics And Cannabis Stocks

….When simple possession of small amounts of cannabis is decriminalized, some of the impetus for legalization of recreational cannabis is diminished, as people are no longer imprisoned and burdened with criminal records for simple possession of small amounts of cannabis. Possibly more important is that decriminalization is the best of both worlds for criminal drug cartels and others involved in illegal cannabis. Under decriminalization 100% of the profits from cannabis go to the criminals and none to the government. Decriminalization also boosts sales for the criminals, since many of those who previously did not buy illegal cannabis out of fear that they could be imprisoned and burdened with a criminal record, now become potential customers for the criminals. Thus, the cartels and others involved in illegal cannabis have a powerful incentive to oppose legalization of recreational cannabis…

They claim they want to keep “big corporations” from profiting from the marketing of cannabis in the way that corporations profit from the sale of alcoholic beverages and tobacco do today. Imagine that in 1933 instead of repealing prohibition at the Federal level, it was only decriminalized. This would mean that use and possession were not prosecuted, but sales would not be legal. Thus, there would be no legal regulated sale of alcoholic beverages and the market would be totally controlled by criminals, who would be the only ones profiting from selling alcoholic beverages. Were that the case today people would regularly be dying from ingesting “bathtub gin”, wood alcohol and even drinking antifreeze, as was the case during prohibition.

On November 3, 2020, New Jersey voters approved New Jersey Public Question 1, an amendment to the state constitution to legalize the recreational use of cannabis by people ages 21 and older, with 67% voting yes and 33% voting no. In my January 2021 article, I relied on statements from New Jersey officials that once the 13 existing New Jersey medical cannabis dispensaries show they can adequately supply both the state’s 97,000 patients and a recreational use market, they can begin legal recreational cannabis sales. That led me to conclude that legalization of recreational cannabis in New Jersey would be particularly advantageous for CURLF. It was at that time tripling its’ capacity with a large new facility just as a shortage of cannabis was accelerating in New Jersey. That meant it might have been the only firm allowed to sell recreational cannabis in New Jersey for some period. At that time also, it was the only producer of certain high-demand products in New Jersey.

On January 1, 2021 recreational cannabis in New Jersey was effectively decriminalized. However, it was not until April 20, 2022, that the first legal sales recreational cannabis in New Jersey took place. Almost $2 million of recreational cannabis were sold on that single day.

The New York Cannabis Situation

In Curaleaf Holdings: One Of New York Cannabis Legalization’s Biggest Winners I said:

… On March 31, 2021 New York Governor Andrew Cuomo signed a 128-page bill legalizing recreational cannabis, referred to as adult cannabis in the bill. Some last-minute changes to the bill were favorable to those holding the 10 permitted medical cannabis licenses. Previously, New York had one of the most restrictive medical cannabis regulations on the planet. The number of firms allowed was capped at 10. Each licensee could only have 4 retail outlets, called dispensaries. Thus, New York State, with almost 20 million people had a ratio of people to dispensaries of 500,000 to 1, or 0.2 dispensaries per 100,000 people. Oregon has 16.5 dispensaries per 100,000 people. Furthermore, the conditions that qualified for medical cannabis in New York were extremely narrow. To buy medical cannabis in New York one had to have a written prescription, that described the medical condition. Such prescriptions could not be obtained from just any doctor, but rather from a limited number of medical practitioners, who had to obtain special licenses to prescribe medical cannabis. It might be noted that the regulations and restrictions on medical cannabis in New York were more severe than those for the most powerful and dangerous opioids, which can be purchased with a prescription at any pharmacy.

With such a draconian regulatory environment, what prompted the 10 companies to incur the many tens of millions of dollars in costs to enter the New York medical cannabis, was a bet on the prospects of recreational legalization. That bet has paid off. Furthermore, vertical integration will not be permitted in the New York adult cannabis market. Firms will only be allowed to have a license to be one of either an: adult-use cultivator, adult-use processor, adult-use distributor, or adult-use retail dispensary. However, a last-minute change in the legislation grandfathered the existing New York medical cannabis operators, who will be allowed to be fully vertically integrated. Also, the existing New York medical cannabis operators, will be able to enter the adult market by simply paying a fee…

That looked very good for CURLF. To put the potential profitability of cannabis in perspective, Table I shows the January 28, 2022 closing price of MONEX live gold spot prices.

Table I MONEX Live Gold Spot Prices

January 28, 2022

Gold Prices Per Ounce	$1,808.00
Gold Prices Per Gram	$58.13
Gold Prices Per Kilo	$58,127.20

Click to enlarge

Source MONEX

Thus, for $58.13 you can buy a gram of pure gold. If you are a registered medical patient, you can buy a gram of cannabis oil similar to what Brittney Griner was alleged to have been arrested for in Russia, for $120 at a CURLF dispensary in New York. That makes cannabis more than twice the price of gold. If CURLF or any of the 10 licensed medical cannabis firms could legally sell cannabis for recreational use in New York today at that price, there would be hundreds of thousands lining up to buy it. However, they can’t.

The New York law says that the existing New York medical cannabis operators, will be able to enter the adult market by simply paying a fee. I assumed, that meant CURLF would have been able to be selling tens of thousands of those $120 grams per day in New York, by now, with the commensurate media coverage lines of customers waiting for hours to do so. However, New York has not permitted any cannabis for recreational use as of yet. The stated purpose of the delay is to allow those who were convicted of crimes involving cannabis, or nonprofit organizations that serve such ex-convicts, to have an indefinite period of exclusivity in the recreational cannabis market. One glitch is that most ex-convicts don’t have access to the capital necessary open recreational cannabis facilities. To address that issue New York State included $200 million in its budget to buy and build turnkey recreational cannabis facilities that will be turned over to those who were convicted of crimes involving cannabis, or nonprofit organizations that serve such ex-convicts. So instead of collecting $billions from legal the recreational cannabis market like Colorado, New York is already down $200 million. What could go wrong.

To get an idea of the extent that politicians have botched legalization of recreational cannabis in New York. On January 21, 2022 the office of the Governor of New York issued the following press release:

…Governor Kathy Hochul announced today that sales of legal, regulated adult-use cannabis will start on December 29 at a dispensary in Manhattan, operated by Housing Works, the nation’s largest minority-controlled HIV/AIDS service organization and largest community-based HIV/AIDS service organization. The non-profit, based in New York City, operates a range of direct and support services for people living with HIV/AIDS, the homeless, formerly incarcerated, and justice involved individuals. It also operates a network of charitable retail storefronts….

…. The storefront operated by Housing Works is located at 750 Broadway in the Astor Place neighborhood. All proceeds from dispensary sales will be directed to parent organization Housing Works, Inc., founded in 1990 to address the dual crises of HIV/AIDS and homelessness. The self-sustaining nonprofit provides job opportunities, legal advocacy and comprehensive housing and health services funded, in part, by revenues from its thrift stores, SoHo bookstore and now its cannabis dispensary. With a focus on compassion and dispelling stigmas, Housing Works endeavors to move the cannabis industry forward by supporting the practical needs of their community through an equity-driven and harm reduction approach.

Spanning 4,400 square feet, the iconic building where the dispensary will be, known as 1 Astor Place, was completed in 1883. Housing Works Cannabis Co will welcome patrons with an introductory shopping experience upon opening, with plans to carefully build out an expanded and thoughtfully curated space as cannabis products become more available.

Housing Works Cannabis Co, located at 750 Broadway in Manhattan’s Astor Place neighborhood, will be open seven days a week, 11 a.m. to 7 p.m…”

As of January 28, that address at 750 Broadway is completely vacant!

Summary and Conclusion- Where do we go from here?

Recreational cannabis will eventually be an extremely large market. However, it might not happen as soon as some who expected legalization at the Federal level to be enacted when the Democrats controlled congress.

Federal legalization or descheduling could lift all cannabis stocks. Even allowing cannabis companies to use the banking system and list on American stock exchanges could give them a boost. Legalization or descheduling would automatically free cannabis companies from the tax code Section 280e that forbids businesses from deducting any expenses from their gross income when it involves “trafficking” schedule I and II controlled substances. This includes taking any credits as well. It is also possible that the Federal tax code could be amended to relieve cannabis businesses from the extra taxes imposed by Section 280e even without Federal legalization or descheduling. That could happen if Section 280e was repealed, or amended so that it would not apply to cannabis businesses.

CURLF and the other cannabis stocks have been beaten down by the lack of progress on the federal regulatory front, as well as the anti-big corporation bias exhibited by states such as New York, in terms of prioritizing social equity ahead of economic considerations, and the possibility that future states enacting legalization might do the same. Furthermore, a reason for the lack of progress on the federal regulatory front is the instance by some politicians that progress on the federal regulatory should only be enacted if it includes similar social equity and anti-corporate provisions.

Eventually, I still think CURLF still has the best chance to be a winner. What longer-term investors seek, in rapidly growing industries such as cannabis, are those companies that turn out to be the winners, or at least the survivors. In 1929 there were over 600 automobile manufacturing companies in the United States. Only a few ultimately became major factors in the industry. To be a winner in a particular industry depends on various industry-specific factors

Retail distribution is generally not where most of the money is made by the ultimate winners, in industries that are comparable to what investors hope cannabis will be. For example, Philip Morris (PM) does not make its money from operating retail stores where tobacco products are sold. Rather, PM has leading brands such as Marlboro and Virginia Slims. Likewise, Anheuser-Busch InBev (BUD) does not make its money from operating retail stores where beer is sold, but from brands including Budweiser, Stella Artois and Corona. Diageo (DEO), which owns Crown Royal, Johnnie Walker, Smirnoff, Captain Morgan, Ketel One, and Baileys does not make its’ money by operating bars and taverns.

The likely winners in cannabis will be the firms the obtain either by acquisition or development the brands and products that garner the greatest market share. As the largest cannabis firm now, CURLF is the best bet to do so. There can be no assurance that will occur. However, as Damon Runyon is thought to have said:

The race is not always to the swiftest, nor the fight to the strongest, but that’s the way to bet.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.