The state-legal cannabis industry welcomed news this spring that the U.S. Drug Enforcement Administration plans to reschedule marijuana as a less-dangerous drug.
If that does indeed happen, the move would open up lucrative tax deductions and credits enjoyed by federally legal businesses.
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But rescheduling doesn’t make marijuana fully legal, and the industry has been battered by oversupply, a general lack of access to mainstream institutional investors and lending, and competition from the illegal market, where weed can be had at lower prices.
“It offers significant economic relief to licensed businesses,” says Erik Knutson, chairman of the American Trade Association for Cannabis and Hemp. “However, without full legalization, the black market will persist in states without legal access to cannabis.”
Still, rescheduling would put more cash in the pockets of state-legal cannabis businesses, helping them to be more competitive with the illicit market, says Matt Karnes, founder of cannabis industry financial analysis and research firm GreenWave Advisors. “For example, increased advertising spending could increase public awareness of tested, legal products, leading to a shift from illicit to legal markets,” he says.
The AdvisorShares Pure US Cannabis ETF (ticker: MSOS) rose more than 20% on the news in early May but quickly gave back much of those gains. The fund, which is the biggest of the cannabis exchange-traded funds, is up only 4.6% so far this year. It remains well below its all-time high of about $55, hit in 2021 amid anticipation that the Democratic Party would move to legalize the plant. That excitement later fizzled.
This time around, some funds are positioning themselves to take advantage of reclassification and all that it implies. Bloomberg reported July 1 that Roundhill Investments has dropped the expense ratio on the Roundhill Cannabis ETF (WEED) to zero from 0.4% for at least a year.
The rescheduling isn’t final, and the industry has been disappointed by a lack of federal action before, perhaps a reason why cannabis stocks haven’t rallied more.
“This is not the time for investors to bet big,” New Cannabis Ventures CEO Alan Brochstein wrote in a newsletter after the news broke. “Instead, investors should pay close attention and perhaps buy dips.”
Investors looking to do so can add these seven pot stocks to their watch lists:
| Marijuana stock | YTD return as of June 28 |
| Ascend Wellness Holdings Inc. (OTC: AAWH) | -9.0% |
| Cannabist Company Holdings Inc. (OTC: CBSTF) | -57.2% |
| Green Thumb Industries Inc. (OTC: GTBIF) | 6.2% |
| Trulieve Cannabis Corp. (OTC: TCNNF) | 77.5% |
| Cresco Labs Inc. (OTC: CRLBF) | 16.5% |
| Verano Holdings Corp. (OTC: VRNOF) | -19.7% |
| TerrAscend Corp. (OTC: TSNDF) | -17.2% |
Ascend Wellness Holdings Inc. (OTC: AAWH)
Normally, balance sheet weakness wouldn’t be a reason to buy a stock. But if rescheduling takes place and the tax burden is removed, that would benefit companies that have struggled to pay taxes with cash flow more than it would others that have been more stable.
“I think that the weakest companies with respect to the balance sheets will benefit the most,” Brochstein told U.S. News. “I think Ascend Wellness and Columbia Care really stand out, but there are others, too.”
According to figures compiled by GreenWave Advisors, Ascend couldn’t fully meet its tax obligations from cash flow from operations from 2020 to 2022. It was able to do so last year.
Ascend is a vertically integrated cannabis operator that has licenses and assets in seven states. Large marijuana companies that operate in more than one U.S. state where the drug is legal are known as multistate operators, or MSOs.
Vertical integration means that Ascend sells marijuana products that it cultivates, processes and manufactures itself, rather than buying weed wholesale to mark up and sell in dispensaries.
As with other vertically integrated companies on this list, the business model gives Ascend 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.
Cannabist Company Holdings Inc. (OTC: CBSTF)
This MSO, formerly known as Columbia Care, posted a loss of $77.7 million in adjusted operating income in the fourth quarter of last year, according to New Cannabis Ventures, which uses the metric to compare the health of cannabis-related companies. Measuring operating income this way adjusts reported income for changes in the fair value of biological assets and often excludes one-time items.
Cannabist has licenses in 15 U.S. jurisdictions and operates more than 120 facilities, including 93 dispensaries and 31 cultivation and manufacturing facilities.
“Retail-heavy cannabis stocks will benefit enormously from rescheduling,” says Brian Vicente, founding partner of cannabis law firm Vicente LLP. “These companies will, for the first time ever, be able to make traditional business deductions such as payroll and rental costs. With these deductions in place, cannabis stores will quickly become much more profitable, which should translate into a significant bump in the value of their publicly traded shares.”
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Green Thumb Industries Inc. (OTC: GTBIF)
“I’ve always said that the majority of the cannabis stocks are more tradable than they are investable,” says Avis Bulbulyan, CEO of cannabis holding company SIVA Enterprises. “That said, with the beating these companies have taken in the past couple of years, this is the type of catalyst that will lift the majority of them.”
For investable companies, Bulbulyan’s top picks include Green Thumb Industries, an MSO that has 20 manufacturing facilities, more than 90 open retail locations and an operational footprint in 14 U.S. markets. Numbers from GreenWave Advisors show Green Thumb’s cash flow from operations has been sufficient to pay its taxes all the way back to 2019, the first full year after the company went public.
Trulieve Cannabis Corp. (OTC: TCNNF)
This MSO is another of Bulbulyan’s favorites. Like Green Thumb, Trulieve’s cash flow from operations has been sufficient to pay its taxes each year from 2019, according to GreenWave Advisors’ numbers. That was the first full year after the company’s public debut.
Earlier this year, the company scored a win when the Florida Supreme Court allowed an initiative to be placed on the 2024 general election ballot that, if passed, will allow adults older than 21 to purchase cannabis products for personal consumption.
Cresco Labs Inc. (OTC: CRLBF)
Bulbulyan also likes this MSO, as does Michael Sassano, CEO of cannabis-based therapeutics company Somai Pharmaceuticals.
“A rising tide raises all boats, but the tier 1 MSOs will get the more stable boost,” Sassano says. “Smaller regionals with strong positions may benefit from increased M&A and consolidation.”
Cresco Labs is a vertically integrated company that operates in eight states and has 13 production facilities and 71 dispensaries. Additionally, it’s involved in wholesale distribution, and its branded cannabis products are sold in thousands of dispensaries in the U.S.
Verano Holdings Corp. (OTC: VRNOF)
This vertically integrated MSO is also on Sassano’s list of top marijuana stocks. It is active in 13 states, 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 in more than 130 company-owned dispensaries. Its brands are sold in hundreds of other retail locations.
Several Wall Street analysts have reiterated “strong buy” ratings on Verano Holdings in the past few months, and their average 12-month target price represents a 128.5% increase from VRNOF’s June 28 closing price.
TerrAscend Corp. (OTC: TSNDF)
This company has vertically integrated operations in Pennsylvania, New Jersey, Maryland, Michigan and California. It also has retail operations in Canada.
GreenWave’s figures show that the company’s cash flow from operations wasn’t sufficient to pay its taxes in 2022 and 2023. But if rescheduling happens, that may mean it stands to benefit more. The anticipated rescheduling would save companies a combined $2 billion in excess taxes, based on 2023 numbers, according to a GreenWave presentation.
Cannabis research firm Whitney Economics last year estimated that operators would pay $2.1 billion in 2023 in additional taxes compared with ordinary businesses. The effective tax rate for marijuana retailers often exceeds 70%, the firm said.
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7 Best Marijuana Stocks to Buy in 2024 originally appeared on usnews.com
Update 07/01/24: This story was previously published at an earlier date and has been updated with new information.
