The Green Thumb Regulatroy Recession?

To say that it’s been rough going for AdvisorShares Pure US Cannabis ETF (NYSE: MSOS) is an understatement. Down 71.57% from its all-time high and 39.03% year to date, the benchmark exchange trade fund has struggled badly in a degrading market environment for speculative growth stocks. Now, it appears the deep underperformance is weighing on MSOS fund holders, who are purportedly liquidating positions.

According to Todd Harrison—an early cannabis investing pioneer and leading capital markets voice in the industry—rumors of fund selling are rampant. As Wall Street veteran and Chief Investment Officer of cannabis-themed family office CB1 Capital, Todd is in good position to uncover such current activity in the market.

At this juncture, it’s important to emphasize that, to our knowledge, these rumors have not been independently corroborated. However, given the deep drawdowns in both MSOS and high alpha growth ETFs in general such as Ark Innovation ETF (down 48.27% YTD), it’s not hard to imagine position paring is occurring near month end.

TDR will report further if concrete evidence of fund liquidation in the cannabis sector surfaces. However, given Mr. Harrison respected stature in the industry, we feel his thoughts are noteworthy messaging worth covering.

Glacial Pace Of Federal Regulatory Reform Weighs On U.S. Cannabis

Irrespective of whether actual fund liquidation is taking place, there is no doubt that the pace of federal regulatory cannabis reform is weighing on the markets. Approximately two weeks ago, Senate Majority Leader and architect of the Cannabis Administration & Opportunity Act (CAOA), Chuck Schumer, announced his encompassing cannabis bill would be introduced in August—not April as previously anticipated. Assuming no further delays, CAOA introduction would come approximately thirteen months after Mr. Schumer revealed a draft outline of the bill in July 2021.

Is pot in a ‘regulatory recession’?

More U.S. states are headed toward allowing the sale of recreational cannabis, including New Jersey this month, giving some analysts hope that the swoon hitting publicly traded pot companies may come to an end.

It’s been quite a rut. The shares of Curaleaf Holdings, Green Thumb Industries and Trulieve Cannabis have plummeted more than 30% this year — much worse than the declines posted by benchmark indexes such as the S&P 500 and Dow Jones Industrial Average. Much of cannabis companies’ slide is due to the failure of reforms that investors had hoped for to materialize so far under U.S. President Joe Biden.

BTIG analyst Camilo Lyon calls it a “regulatory recession,” given that the stocks still trade at low multiples to their earnings, and many companies have seen growth rates of 60%.

“If there were any doubt about the demand profile for the category, one only needed to visit an adult-use dispensary this past weekend in New Jersey to see hour long lines of people waiting to buy legal cannabis,” Lyon said in an April 26 research note. “Cannabis, with its many federal and state regulatory restrictions still in place, has been driven into recession by slow-moving policy changes.”

He’s optimistic, however, that this may end soon. Lyon cited the prospects for the SAFE Banking Act, which would allow financial institutions to offer banking services to legal cannabis businesses without penalties from federal regulators, and President Biden’s recent commutation of 75 sentences for individuals serving nonviolent drug offenses. He also mentioned expected upcoming legalizations in a new round of states including New York, Maryland and Pennsylvania.

To be sure, there are plenty of obstacles still. Republicans are favored to win back at least one house of Congress this year, which might decrease the odds of federal reform. This risk was underscored on April 1, when the House passed the Marijuana Opportunity Reinvestment and Expungement Act for a second time — with only three Republicans voting for it.

And while much has been made of Biden’s commutations, his drug czar’s strategy also wants to reduce cannabis consumption. The 152-page report, the administration’s first drug-control strategy, is mostly focused on harm reduction and addiction treatment. But it also notes that marijuana use among high school students in a survey was 36.8% — much higher than opioids. It calls for the expansion of programs to stop youth use.

What you need to know

    The U.K. government has become a part-owner of a medical cannabis company, a yogurt-bar business and a yacht charter firm after another 75 emergency startup loans made during the pandemic converted into shares.

    Field Trip Health, which specializes in psychedelic-assisted therapy, said it will separate into two public companies, with one focusing on “providing personalized care” and the other on developing psychedelic therapies.

    New Jersey’s marijuana dispensaries grossed $1.9 million from sales of weed and related products to 12,438 customers on the first sales day, April 21, according to the state cannabis commission.

    Canopy Growth said it expects charges of C$250 million to C$300 million ($195 million to $234 million) in its fourth quarter as it cuts jobs as part of a series of initiatives to reduce costs. Cantor Fitzgerald slashed its price target on the company’s shares by about 30%, with analyst Pablo Zuanic noting that Canopy’s stock slump has widened its valuation premium with pot rival Tilray.