Cannabis Endgame

The Legislative Focus is Misleading Investors

Prices drive narrative.

And cannabis investors (who are mostly retail or cannabis focused investors) are no different than other investors by focusing on price action to tell them what the story is. And nowhere is this more apparent than the intense focus on legislative action in Congress.

Not four months ago, cannabis stocks and sentiment was high as a kite on speculation of what the new Democratically controlled Senate would bring to federal legalization or at least in allowing institutional investors to participate in the cannabis sector. Now we are on the eve of Schumer releasing a draft of his cannabis reform bill, which is supposedly going to be called the Cannabis Administration and Opportunity Act, and the sentiment is anemic.

Unlike four months ago, thanks to lower or flat cannabis stock prices, skepticism is very high for what will be in the bill, the chances of the bill passing or even the time frame of when even a sliver of the bill will be passed.

This intensive focus on legislative action misses the forest for the trees.

Why ask when cannabis will be legalized and in what format? That is a really hard question to answer and a lot of people are guessing, strategizing, trading, etc. Notice the question isn’t will cannabis be legalized, but when. Instead of asking when legalization will come, why not instead ask what the endgame will look like when it does happen.

How about answering these much easier questions?

1.     Will there continue to be a substantial disparity in valuations between leading cannabis companies? For example, see the difference between cannabis favorites Curaleaf (OTC: CURLF) and Green Thumb (OTC: GTBIF) and the other leading cannabis companies such Cresco (OTC: CRLBF), Verano (OTC: VRNOF) or AYR Wellness (OTC: AYRWF). (hint: a more efficient market with broad institutional participation should mean that these differences are arbitraged away)

2.     What are valuations of cannabis companies likely to be when institutions are involved?

3.     What will the cost of capital for cannabis companies be?

I’m not skilled enough as a seer to predict when or exactly how legalization will happen. But I can tell you that it does not make sense that Verano, AYR Wellness and Cresco trade at such a discount to their peers, but on the other hand Green Thumb isn’t priced correctly compared to other comparable sectors like alcohol or consumer branded companies.

What seems clear is that cannabis stocks will trade on the NYSE and NASDAQ and there will be some kind of legalization, and when that happens a lot of the inefficiencies in the market will end.

The endgame will also include interstate commerce which I have written about. Even Supreme Court Justice Clarence Thomas is all but inviting legal cases to the Supreme Court regarding the weird federal/state issues with cannabis. But while I believe the restrictions are unconstitutional, I admit that the process of dismantling interstate commerce may take some time.

But if you think how institutional investors think, then you realize they will need to either hedge or place a bet in case interstate commerce happens quicker than expected. And what will they do to hedge that bet? My guess is that they will buy Glass House Group (OTC: MRCQF) and a select few others that they think might benefit from interstate commerce. And this buying power will drive these stocks higher.

So, in summary, smoke a little smoke, take a little chill and stop worrying about congressional machinations. We know what is going to happen, we just don’t know when. Instead think about the endgame. Enjoy the mis-pricing and non-fundamental based price trading, because the cannabis sector won’t be retail driven or inefficient for that much longer.