I Want to Take You Higher
* And thank you (Falettinme Be Mice Elf Agin)
* Given the superior reward vs. risk that I see, I have substantially increased my cannabis holdings over the last month...
Beat is getting stronger
Music gettin’ longer, too
Music is a flashin’ me
I want to I want to I want to take you higher
-Sly and The Family Stone, I Want to Take You Higher
“Be greedy when others are fearful.”
– Warren Buffett
The legions of retail traders and investors in cannabis over the last half a decade (aka “the walking dead“) have gotten absolutely decimated in the space.
Resultingly (and in the absence of institutional involvement in the sector), the demand/supply equation is problematic as the illiquid trading conditions are suboptimal — having left retail unable to sustain any price cannabis stability and appreciation.
Of course, in a market that is momentum-oriented (“buyers live higher, sellers live lower”), the continued selling in cannabis begets more selling.
It is my view that this has created a unique longer-term investing opportunity for the reasons mentioned in the body of this post — with upside reward at roughly 4x downside risk.
Most importantly, it is likely that the rescheduling of adult recreational use of cannabis will be implemented in the relatively near term.
Almost as important will be the possibility of some retroactive relief (probably back to 2023 when HHS granted relief for medical marijuana usage) from the accumulated and large tax obligations (UTP or Uncertain Tax Position) imposed by Section 280E in the IRS Code:
UTP stands for Uncertain Tax Position. It refers to tax deductions or credits—frequently related to Internal Revenue Code Section 280E, which historically barred cannabis businesses from claiming ordinary business expenses—that multi-state operators carry as financial balance-sheet liabilities while disputing or awaiting federal reform.
– AI Overview
As noted previously, I am growing much more optimistic about the prospects for share-price appreciation in the cannabis complex. Here are some of the reasons for my enthusiasm:
* I am extremely confident that rescheduling of both medical and adult recreational use will pass in the next few months. The consensus view is much more skeptical (measured by Polymarket) providing investors with an “overlay.” (In betting terms it’s a selection where the offered odds are higher than the true probability. In the case of cannabis stocks they are discounting a too low probability of rescheduling than I expect) — ergo, I am getting a better payout! (As mentioned above, some retrospective relief of IRS Code 280E will likely follow, serving to reduce current UTP (tax debt obligations) and increase the intrinsic value of cannabis companies).
* Reverse splits for many companies have set up for uplistings on the senior U.S. exchanges — to be implemented in the near term. This improves the possibility of institutional involvement.
* More relaxed custodian rules will also likely set the stage for active institutional interest in the group.
* Speaking of institutional ownership, I like getting ahead of it.
* The recent debt refinancings have eliminated the frightening debt maturity cliff that some feared. Both interest rates and maturities are favorable for the group.
* Based on this week’s EPS releases, industry fundamentals (volumes and pricing) have stabilized.
* Given the above, expectations are extraordinarily low.
* Massive absolute and relative underperformance over the last five years has created a long runway for appreciation.
* The equity capitalization of the five largest cannabis players only totals about $5.5 billion!
* I expect industry consolidation over the balance of the year and it is not out of the realm of possibility that tobacco or consumer packaged goods companies try to get a toehold in the cannabis sector through the takeover of several of the top-five individual cannabis companies.
Again, for emphasis — this is a speculative space so comply with your risk disciplines and appetite.
As for me, I relish the weakness as an opportunity based on my previous comments.
Hall of Fame baseball player “Wee” Willie Keeler (who weighed only 140 lbs and stood only 5’4″) famously explained his high batting average by saying he aimed for open spaces on the baseball field where fielders were not standing:
“Keep your eye clear and hit ’em where they ain’t.“
In cannabis, we are hitting ’em where they ain’t.
Finally, thank you (Falettinme Be Mice Elf Agin)!
Position: Long MSOS (VVL), MSOX (S), VRNO (S), TSNDF (VS), GLASF (S), GTBIF (S), TRLV (S), CURLF (VS)
