The coming year could be a big one for cannabis stocks.
The U.S. Drug Enforcement Administration has five categories of drugs based on their potential for abuse, dependency and acceptable medical use. Marijuana is listed as Schedule 1, alongside heroin and LSD, but after a recommendation from the Department of Health and Human Services, the DEA is considering dropping it down to Schedule 3.
That would be a huge deal for the state-legal cannabis industry. Companies that grow, manufacture and sell cannabis products (also known in the industry as “plant touching” businesses) in states that have legalized marijuana still technically are committing a crime under federal law, under which the drug remains illegal. Because they are “trafficking” in a Schedule 1 substance, Internal Revenue Service Code Section 280E prohibits marijuana companies from taking certain tax deductions and credits that federally legal businesses enjoy.
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It’s a huge overhang for the industry. Meanwhile, Whitney Economics estimates operators will pay $2.1 billion in 2023 in additional taxes compared with ordinary businesses. The effective tax rate for marijuana retailers often exceeds 70%, the cannabis research firm says.
Cannabis stocks rallied in September on the news of Health and Human Services’ recommendation. But they quickly sank back, with the New Cannabis Ventures Global Cannabis Stock Index down about 18% year to date as of Dec. 14, although it is off its lows.
Cannabis investors have learned to be cautious when it comes to valuing companies based on the potential for change in Washington. After all, political gains among Democrats in 2020 and 2021 failed to produce meaningful federal legislative reform. And bills that would legalize marijuana or provide more incremental changes are unlikely to be the priority of House Speaker Mike Johnson, who has voted against federal marijuana legislative changes in the past, according to the National Organization for the Reform of Marijuana Laws, a cannabis advocacy group.
Although the DEA’s decision doesn’t hinge on Congress, cannabis investors aren’t holding their breath. That leaves some cannabis stocks beaten down, and they may be bargains for investors who are willing to hold them for a long time.
| Marijuana stock | YTD return through Dec. 14 |
| Green Thumb Industries Inc. (ticker: OTC: GTBIF) | 16.8% |
| MariMed Inc. (OTC: MRMD) | -17.4% |
| Organigram Holdings Inc. (OGI) | -57.2% |
| SHF Holdings Inc. (SHFS) | -44.8% |
| TerrAscend Corp. (OTC: TSNDF) | 21.2% |
| Curaleaf Holdings Inc. (OTC: CURLF) | -12.6% |
| Verano Holdings Corp. (OTC: VRNOF) | 31.1% |
Green Thumb Industries Inc. (OTC: GTBIF)
For some marijuana companies, their large tax bills have exceeded the amount of cash they generate from operations, leaving them to essentially have to raise capital to pay taxes, notes Matt Karnes, founder of cannabis industry financial analysis and research firm GreenWave Advisors.
But others have been able to earn enough to cover their taxes with operational cash flow, even without federal reform.
“While a rising tide lifts all boats, those that have scaled and are able to generate sufficient levels of cash flow from operations to satisfy current tax obligations will likely fare better, at least initially, than those that have been unable,” Karnes says.
One of those companies whose cash flow from operations exceeds its taxes paid is Green Thumb Industries. Through September, it topped a GreenWave Advisors list of such companies, with taxes paid making up just 34% of operational cash flow.
MariMed Inc. (OTC: MRMD)
If the DEA does move marijuana to Schedule 3, cash flow for the industry would improve and lead to higher stock market valuations, Karnes says.
For MariMed, another top company on the GreenWave Advisors list, rescheduling would free up 60% of its cash flow based on 2023 data through September.
MariMed develops, owns and manages seed-to-sale cannabis facilities. This month it said it had started manufacturing and processing cannabis products in a new facility in Illinois after construction and regulatory delays. In July, the company started adult-use retail and wholesale operations in Maryland.
In the third quarter, the company reported its 15th-straight quarter of positive adjusted earnings before interest, taxes depreciation and amortization, or EBITDA.
Still, because of delayed openings, cost inflation and increased competition, the company lowered its guidance for this year’s revenue to between $148 million and $150 million from prior guidance of at least $150 million.
Organigram Holdings Inc. (OGI)
This company is focused on producing indoor-grown cannabis for medical and recreational customers in Canada.
Although it doesn’t have the 280E tax problem like companies with a U.S. footprint, it and other Canadian pot companies have had their own woes. Like in the U.S., they’ve been battling competition from the illegal weed market, where providers can sell marijuana for cheaper because they aren’t regulated and don’t pay taxes. Canadian companies also face competition from a crowded legal market, and all that competition means they have to sell their product at low prices. And, as in the U.S., prices have also been under pressure because of a supply glut.
Amid the uncertainty, Organigram Holdings has a certain amount of stability that many other marijuana companies don’t have: the backing of a much bigger, more established company.
British American Tobacco PLC (BTI) holds 19% of Organigram’s equity, but in November it said it would increase that stake to 45% between January 2024 and January 2025.
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SHF Holdings Inc. (SHFS)
Most financial institutions stay away from lending to the marijuana industry out of fear of being charged with money laundering or aiding and abetting a federal crime.
But there is a loophole if companies file certain paperwork with each transaction, a chore that SHF Holdings, through Safe Harbor Financial, undertakes to provide traditional banking services to cannabis, hemp, CBD and ancillary operators.
It’s not entirely clear how a DEA rescheduling would affect marijuana’s place in the banking world, and that gives SHF Holdings an edge because of its already-existing relationships and experience in cannabis lending.
Even if Congress decides to exempt marijuana from federal money laundering laws, opening the cannabis lending space to much more competition, SHF CEO Sundie Seefried contends that not all banks are going to want to get into marijuana lending, meaning there will still be a place for specialty cannabis banks like Safe Harbor Financial.
TerrAscend Corp. (OTC: TSNDF)
This company has vertically integrated operations in Pennsylvania, New Jersey, Maryland, Michigan and California. That means it sells marijuana products that it cultivates, processes and manufactures itself, rather than buying weed wholesale to mark up and sell in dispensaries.
The company also has retail operations in Canada. The stock is up 21.2% in 2023 as of Dec. 14, and according to a New Cannabis Ventures note, “Insiders have been buying it the whole time.”
Most notably, JW Asset Management, whose chief investment officer is also TerrAscend’s executive chairman, has amassed a roughly 30% equity stake in the company, including shares purchased this month.
It’s not the only insider buying in the industry, the New Cannabis Ventures note says. Aside from British American Tobacco upping its stake in Organigram, executives and directors have been buying SHF Holdings’ shares, and in a rare move for the sector, Green Thumb Industries recently bought back 2.5 million of its own shares.
“We have discussed all year how cannabis stocks are cheap relative to how they have been valued historically,” the note says. “Investors looking for a sign that folks are interested don’t see that in the trading volumes, which remain low. There is, however, evidence that insiders see the valuations as low.”
Curaleaf Holdings Inc. (OTC: CURLF)
Large marijuana companies that operate in more than one U.S. state where the drug is legal are known as multistate operators, or MSOs.
MSOs offer geographic diversification. If one jurisdiction where they operate decides to increase taxes or change regulations in a way that’s unfavorable to the company, other states in which the company operates can act as a cushion. Additionally, MSOs will be in a good position if the federal government ends up allowing trade across state lines.
The biggest MSO based on its $2.8 billion market capitalization, Curaleaf is no stranger to geographic diversification. It has a presence in 17 states, operates 21 cultivation sites and sells from 147 dispensaries.
Verano Holdings Corp. (OTC: VRNOF)
Here’s another vertically integrated MSO. Verano is active in 13 states. It grows more than 160 strains of marijuana at 14 cultivation and production facilities with more than 1 million square feet of cultivation capacity, and it sells its products at 135 company-owned dispensaries. Its brands are sold in hundreds of other retail locations.
The vertically integrated model gives the company more control over how its products are grown and made, and that means it doesn’t have to pay a premium to buy marijuana from others. It also creates operational efficiencies.
Verano’s “scalable, vertically integrated platform is well positioned to capitalize on significant tailwinds as additional states legalize cannabis for both medical and adult use,” the company says.
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7 Best Marijuana Stocks to Buy in 2024 originally appeared on usnews.com
Update 12/15/23: This story was previously published at an earlier date and has been updated with new information.
