Macro

Weed Stocks Soar, FDA Nods, Market Eyes $200B Boom

Cannabis industry sees resurgence with ETF doubling in value, fueled by regulatory shifts and increasing legalization efforts.

By Bill Bullington

4/4, 03:23 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
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Key Takeaway

  • AdvisorShares Pure US Cannabis ETF doubled since last summer, signaling renewed investor interest in U.S. cannabis stocks.
  • FDA's recommendation to reclassify cannabis could significantly reduce financial burdens on state-licensed operators like Green Thumb.
  • With potential federal reform, the U.S. cannabis market could grow to $200 billion, benefiting legal operators and investors.

Cannabis Sector's Resurgence

The cannabis industry, particularly in the United States, is experiencing a notable resurgence, as evidenced by the AdvisorShares Pure US Cannabis ETF (MSOS) doubling its value from last summer's low to a recent $10.25. This revival is fueled by several factors, including regulatory shifts and increasing state legalization. The FDA's recommendation to reclassify cannabis from Schedule I to Schedule III, signaling a potential easing of federal restrictions, has been a significant catalyst. This reclassification could notably reduce the financial burden on state-licensed operators by normalizing federal tax treatment, potentially lowering effective tax rates that currently exceed 75% for some.

Legal and Political Momentum

The momentum for cannabis legalization is gaining on multiple fronts. Legal actions, such as the lawsuit filed by David Boies against federal restrictions and Trulieve's successful tax refund claims, highlight the industry's push against federal constraints. Politically, President Joe Biden and Vice President Kamala Harris have shown support for cannabis reclassification and legalization, respectively. State-level progress is also evident, with Ohio legalizing recreational sales and Florida moving towards a vote on recreational use in November 2024. These developments suggest a growing acceptance and potential for federal reform.

Financial Landscape and Opportunities

Despite the industry's past volatility, there are signs of financial stabilization and growth opportunities. U.S. cannabis sales currently stand at about $100 billion, with only $30 billion captured by state-licensed sellers. Analyst Pablo Zuanic of Zuanic & Associates projects that with federal reform, the market could expand to $200 billion, benefiting legal operators significantly. The sector's financial health is further underscored by companies like Green Thumb, Verano, Cresco, and Trulieve Cannabis trading at attractive EBITDA multiples, indicating potential investment opportunities amidst the industry's revival.

Street Views

  • Pablo Zuanic, Zuanic & Associates (Bullish on U.S. cannabis operators):

    "This is a sector that’s very difficult to trade on a short-term basis... If you take a longer term view and own quality names, you can be comfortable that there’s a lot more upside."