Bet You’ve Heard This One Before…Now Is The Time To Invest In Cannabis

Forbes Money Markets Bet You’ve Heard This One Before…Now Is The Time To Invest In Cannabis Kris Krane Senior Contributor Opinions expressed by Forbes Contributors are their own. I write about the cannabis industry. Following Jun 7, 2023, 05:46pm EDT | Press play to listen to this article! Got it! Share to Facebook Share to Twitter Share to Linkedin For anyone following the cannabis industry and the cannabis capital markets over the past two years, they’ve experienced a lot of doom and gloom.

Since experiencing record high public company valuations after the 2020 elections, spurred by a belief that unified Democratic control of Congress would shepherd in much needed federal cannabis reforms, particularly the passage of banking reform opening traditional capital markets to an industry that has been shut out of them since its inception, the cannabis industry has experienced its worst downturn since states began legalizing adult-use of marijuana in 2012. Cannabis in stock sign seen in South Edmonton. On Wednesday, 24 August 2021, in Edmonton, Alberta, .

. . [+] Canada.

(Photo by Artur Widak/NurPhoto via Getty Images) NurPhoto via Getty Images The industry has become challenging for business owners and investors alike over this time. Public company stock prices are at all-time lows, with most public company stocks worth as little as 1/10 th their value of just two years ago. The impact of the capital markets implosion has trickled down to private single state operators, who have found private investors reticent to put capital into an industry viewed as being on a downward trajectory- plainly said, the gusher of private investment into the space has dried up into a trickle.

Further, general strains on the broader economy and banking system have only further spooked investors and slowed investment in general, something felt by cannabis businesses who already faced a limited pool of potential capital sources due to lack of access to the banking system and institutional investors. Meanwhile the industry has seen nearly universal price compression, driving down wholesale prices and margins in an industry that already has little margin to spare due to the crippling effects of the 280e provision of the IRS tax code, which treats state licensed cannabis businesses as drug traffickers, rather than the legal operators that they are, and prevents them from taking standard business deductions on their taxes, effectively bumping them into a higher tax bracket and eating away at all or most of their margins. With these negative forces at play, it is understandable that many potential cannabis investors are currently sitting on the sidelines.

But with crisis comes opportunity. Investors considering current market conditions and potential for blue sky ahead should see that this could be the ideal time to put their capital to work in the cannabis industry. Starting with the public markets, it has indeed been a rough ride for cannabis stocks.

Those who put money into the market during the highs of late 2020 and early 2021 are understandably reluctant to throw good money after bad. But there’s a big difference between buying public stocks at a market peak vs. a market valley.

Cannabis company stocks are currently at their lowest point ever, but as will be detailed below, there are still lots of reason for medium- and long-term growth. MORE FOR YOU At The Bleeding Edge Of Ukraine’s Counteroffensive, The Ukrainian Marine Corps Switches Up Its Tactics Twitch Hit With Backlash And Boycott Threats—As Streamers Say New Rules Threaten Their Income Do You Have An Avoidant Partner? Research Explains How You Can Make Them Feel Secure Of course, investors must accept the risk that even though stock values are at an all-time low, they can still go lower. And the days of betting on a company simply because they are in cannabis are and should be in the past.

Investors need to do their research on which companies are solid operators and not just license aggregators playing capital market games. Investors would be wise not to put all their eggs in one basket, and could spread around investment in a variety of top and middle tier publicly traded companies in the space, building a cannabis stock portfolio that can still provide returns upon a market turnaround even if one company does not make it through the current downturn. And while negative forces continue to hurt the cannabis industry, there is reason for optimism for both public and private companies.

It was recently announced that Terrascend is preparing to up-list from the Canadian Securities Exchange (CSE) to the Toronto Stock Exchange (TSX). Currently, the vast majority of American publicly traded cannabis companies trade on the CSE, which provided a much-needed capital injection into the industry from 2017 to 2020, but which has relatively low trading volume and whose investors are largely tapped out on cannabis companies after two market crashes. Eventually, U.

S. based cannabis companies will want to up-list beyond the TSX to the Nasdaq or the US Stock Exchange, which would open up a far wider and more lucrative institutional investor pool than anything available in Canada. This will almost certainly take a change in federal law, but that is likely to come in time, albeit in a very uncertain timeframe.

But should Terrascend’s move to the TSX prove successful, it could result in other U. S. based cannabis companies quickly following suit, opening access to a much larger institutional capital base that continues to be entirely shut out of the American cannabis capital market.

Such a move could lead to a boost in the stock prices of companies that are equipped to make this transition. And it is important to note that U. S.

based exchanges are not opposed to listing cannabis companies. In fact, nearly all of the largest Canadian cannabis businesses currently list on the Dow or the Nasdaq. What has stopped them from taking on larger American cannabis businesses is the simple fact that cannabis remains illegal under U.

S. federal law. But changes to federal law and regulations, championed by leaders on both sides of the aisle, could lead to these lucrative exchanges finally opening their doors to American companies.

Private companies are also finding it challenging to raise capital as the investment community is largely spooked by plunging valuations, plummeting wholesale pricing and overall unease with rising interest rates and insecurities in the banking system. But these market conditions mean that those willing to take the risk of investing in cannabis businesses could enjoy lucrative rewards. The lack of capital means that investors can take their pick of private company investments and get in at valuations they may never see again.

Of course, smart diligence is required, but choosing to invest in solid operators who are positioned to survive and thrive in more competitive environments could provide huge payoffs as the industry grows and new capital flows back in. FundCanna , a debt based investment firm focused on growth stage cannabis companies, has doubled down on the sector during this time. CEO Adam Stettner believes that market conditions are ripe for debt deals in cannabis today.

Says Stettner, “Equity is almost always the most expensive form of capital, in this environment it becomes even more so. Valuations are lower than prior rounds and the cannabis economy remains uncertain due to uncertainty regarding legislation/regulation. Debt is available in many forms and when used to fuel revenue, drawing on debt is one of the most powerful tools available to business.

” While price compression has significantly hurt cannabis businesses large and small, this trend was inevitable, and the current environment will force companies to revamp operations and focus on efficiency to survive. After all, the $4,000 per pound wholesale prices that many companies enjoyed as recently as a few years ago were always artificially inflated. These prices initially mimicked those of the illicit market which consumer were used to paying.

But illicit market pricing is not reflective of the true value of a pound of cannabis. Instead, it reflects the inherent risk of operating in a completely illegal environment where risks include arrest and prison time. These prices persisted in the earlier days of the industry because of state mandated limited licensing programs, which put control of each state industry in the hands of a relatively small number of companies, allowing them to operate in an oligopolistic environment with limited competition that provided little pressure to reduce pricing.

As most states have moved from limited licenses to a more market-based approach, the increase in competition has driven down pricing to a point that is far more reflective of the actual value of a pound of wholesale cannabis. Companies that are able to adjust operations and make it through this period of compression should be much better positioned to compete in a price stabilized “new normal” into the future. Taking a longer-term outlook on the cannabis industry, there are lots of reasons to be optimistic about where the industry is eventually headed.

Of course, it would be foolish to predict exactly when these changes will occur since many of them are reliant on legislative or regulatory changes that are outside the industry’s control. But the overall trendline of cannabis policy reform is clearly in the industry’s favor. After all, just 10 years ago only two states had legalized cannabis just a few months prior and none had yet implemented legalization, there was no such thing as a Multi-State Operator and no cannabis companies were publicly traded on a major U.

S. or Canadian exchange. Only a couple of years earlier cannabis businesses were contending with civil asset forfeiture proceedings from federal prosecutors and dispensary owners regularly included DEA raid training as part of their pre-opening procedures.

The challenges put today’s battles over federal banking reform in context as largely business-related challenges rather than the existential threats faced only a decade ago. In the coming years we should expect to see this trendline continue despite current business headwinds. After all, not even half of U.

S. states have legalized cannabis for adults, with new large states such as Florida, Pennsylvania and Ohio expected to join the ranks of legalization in the next few years, opening up new markets and new lines of revenue for existing and new cannabis businesses alike. There are even new medical cannabis markets opening up, as evidenced by states like Mississippi and Alabama adopting medical laws in recent years and efforts under way to open or expand medical markets in places like Texas and South Carolina.

There is no other industry in America that can so clearly point to new markets just waiting to become open for business. At the federal level, reform has certainly been slower moving than in the states, but here the trendline is also in the cannabis industry’s favor. After decades of never passing, or even seriously considering, any cannabis reform legislation, the U.

S. House of Representatives has passed multiple reform bills, including the SAFE Banking Act five times and the legalization focused MORE Act twice. While the Senate has not yet acted on any of these proposals, there have been serious efforts made to do so, and the issue enjoys the full support of Democratic Senate leadership with some Republican backing.

In fact, the lack of success in passing legislation can be attributed less to a lack of support than disputes of the proposal’s details. While the timeline is unclear, in the long term we should expect real reforms at the federal level. Passage of SAFE Banking, in this or a future Congress, would open access to institutional capital in the United States that has to date sat on the sidelines, providing a major shot in the arm to public and private companies alike.

Reform of the 280e provision of the IRS tax code would eliminate the largest compressor of margins in the industry today. Or, if the feds move too slow, states can pitch in like New Jersey and Illinois , which recently de-coupled the states tax provision from the federal, providing a little bit of relief to the states’ cannabis businesses. And of course, we should eventually expect to see federal legalization or rescheduling, legitimizing the entire industry nationwide.

In fact, largely overlooked during President Biden’s announcement last year that he would be pardoning federal cannabis prisoners was his call for the federal government to conduct a full review of marijuana’s scheduling under the Controlled Substances Act, a process that is currently underway and largely expected to be completed by sometime in 2024. There is a real possibility that this will end with cannabis being moved from its current classification as a Schedule 1 substance, defined as having no recognized medicinal value and a high potential for abuse, down to Schedule 3 or lower, which would end 280e and likely lead to a wave of new investment in the space driven by the lowered risk of cannabis no longer being among the most restricted substances in the country. There is not another industry in the country that can point to such a clear path to regulatory fueled growth as what the cannabis industry will see upon passage of these much-needed reforms.

While nobody should look at an investment in cannabis as a path to get rich quick, those willing to take a long-term outlook and invest capital into an industry currently experiencing market lows, could be rewarded in a manner largely unimaginable in any other industry. Follow me on Twitter or LinkedIn . Kris Krane Editorial Standards Print Reprints & Permissions.