One of the more attainable goals that I’m setting for myself in 2023 is to write a weekly article focused on what I learned that week in the cannabis industry. It will no doubt relate to that week’s podcast episode and perhaps my top takeaways from that week’s conversation. It will also look at the broader goings-on in the sector – my attempts to glean meaning from that week’s news; sharing – or contesting – a particular piece of analysis.
Dear readers, I’d love it if you leave comments about topics you’d like to see covered, questions you have about certain stocks or doubts you have about sector strategies. In short, let me know what you want to know!
2022: Annus Horribilis
We’re a couple days away from a New Year. The sector’s been pretty quiet after realizing the ‘near certainty’ of SAFE’s passage was yet another puff of smoke. Many stocks have been decimated over the course of the year.
As the inimitable Alan Brochstein wrote on Christmas Day:
A lot went wrong for stocks this year, but cannabis stocks suffered far worse than they should have. This terrible year for cannabis stocks got worse this past week as we experienced dramatically lower prices.
But, and forgive the overused term, the real ones are still working and it will be interesting to see what becomes of their efforts. In celebration of passing 200 episodes, we released MasterClass In Cannabis Investing Redux which echoed something we’ve been hearing from podcast guests throughout the year, namely, the importance of focusing on companies with cash.
Trulieve (OTCQX:TCNNF) for instance recently announced the closing of two enviable non-dilutive financings.
On the other hand, as Viridian Capital Advisors pointed out:
Companies with high leverage or perceived liquidity are receiving less hospitable treatment. Jushi (OTCQX:JUSHF) recently priced a deal with 50% warrant coverage and an effective cost of around 15.25%.
As Tim Seymour mentioned in September,
I do think that there is an opportunity to outperform this market if you’re switched on. And I think there are companies also that are differentiating themselves right now. And I think in multi-state operator land, you know, and the MSOs, like, I think they are still the most interesting investments, but some are separating from others.
And if we expect to be at the top, you know, the top weightings in our balance sheet to the U.S. operators, but not all of the big 5 or 6 are going to continue to be the big 5 or 6.
…those companies that have the ability to first of all generate free cash flow from operations, plus or minus their tax bill, but let’s see where some of these companies become a little bit more cash flow focused. And some of these companies can pull back on their spending. And I think some of that, you know, we like, I want to see better balance sheets, I want to see at least some of these trends, some of these companies claim they are going to see some increase in cash flow and margin.
Things to watch out for in 2023
New York begins it legal adult-use sale of cannabis today (Neighboring Connecticut begins adult use sales on January 10). Regarding NY cannabis, I couldn’t put it better than one of my favorite cannabis analysts, the always insightful Emily Paxhia:
I think it’s going to be very difficult for the public companies to do well within New York State for the short-term. But that being said, it’s a part of a larger portfolio for them. So, hopefully, they didn’t over resource New York, and they’ll be in good shape. And we’ll find out pretty soon in the next queues on that. But I am happy that there was good intentions around what to do for equity applicants in the state of New York.
I do think the execution of it appears to be fraught with challenge, and, frankly, fraught with opportunity for corruption.
Another challenge/data point to be aware of is good ol’ supply and demand.
This year, with restaurant and travel spending back to normal, the growth in [cannabis] demand has tailed off, and even reversed in some of the most mature markets. Lower-income consumers have also seen high inflation slash their real disposable income. Amid the resulting supply glut, Cannabis Benchmarks’ volume-weighted U.S. spot index for wholesale cannabis flower is down 27% in 2022.
Colorado is seeing record lows in the average price of wholesale:
In Colorado, the wholesale price of marijuana is at a record low. Today, it costs $658 per pound. That’s half the price compared with this time last year, when it was selling for $1,316.
“The price of marijuana is at the lowest since the recreational marijuana was legalized in Colorado,” said Alex Padilla, professor and chair of economics at Metropolitan State University of Denver. “I believe that the decrease in price is a result of the increase of supply of marijuana.”
Revenue is also down. In September of 2022, stores made nearly $147 million ($146,880,577) worth of marijuana sales. That’s down from more than $181 million ($181,130,791) in September of 2021 and $206 million ($206,488,268) in the same month of 2020.
Take a look at a number of other similarly suffering states like Massachusetts:
Add Massachusetts to the growing list of oversupplied recreational cannabis programs. Similar to Colorado, Michigan, Oregon and Washington state, Massachusetts has too much cannabis on the market and demand can’t keep up with supply, causing prices across several sectors to fall by up to 50% since this time last year.
Notably,
2022 was also the first fiscal year in which any state cannabis tax revenue declined from the previous year: California, Colorado, Nevada, Oregon and Washington – the more mature legal markets – all saw declines, while Alaska stayed flat.
While SAFE didn’t make it this year, we would do well as investors and/or activists to push as much as we can for cannabis descheduling. To that end, we have seen some promise around this from President Biden himself when he asked the US Department of Justice and Health and Human Services to “review expeditiously how marijuana is scheduled under federal law.”
GlassHouse’s (OTC:GLASF) Graham Farrar believes (even when almost everyone thought SAFE was passing in the Lame Duck session) these directives from Washington are more strategy than stunt.
…there’s only two ways to legalize cannabis. One is through Congress. 60 votes, partisan politics, Republicans, Democrats, horse trade, all the sh*t that we know that like freezes things up. That’s not a very optimistic path.
The other path is what Biden kicked off, which doesn’t involve Congress at all.
Many questions remain. When will share price and valuation match with fundamentals? I don’t know, but I know that they will. When will cannabis be descheduled? I don’t know but I hope we get it rescheduled at the very very least. When will we see the end of onerous and absurd regulations like the 280E tax or the start of cannabis companies uplisting to major exchanges? I don’t know that either, but I do know hope isn’t a worthy strategy. Also, you better believe it’s coming.
Cannabis isn’t going anywhere. It is growing and will continue to do so – it has proven itself indispensable to humanity. Despite years and billions spent on eradication and disinformation, the plant – and its supporters – are not only still here they’re more powerful in reach and in number.
You can’t time the market, but for those with much stronger stomachs than I, you can try to trade it. For investors with a long-term horizon like myself, we should still be able to benefit from long-term growth. If you’re new money in this sector, I’m jealous, because those of us who held on through the glorious highs of early 2021 are feeling cranky.
To those who sold at the top: kudos. To those who reinvested smartly: kudos. To those harvesting their tax losses, kudos. To those who remain patient, realistically optimistic and part of the change, kudos.
To our cannabis investing community, wishing you a tremendously blessed 2023.
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.
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