Proactive Investors - Cannabis culture is being celebrated today on “4/20” with weed lovers gathering at events to partake in the plant and enjoy retail promotions.
While the history of 4/20 is disputed, most trace it back to a group of students who attended San Rafael High School in California in the 1970s. The students would meet by a statue on campus after classes and extracurriculars were over for the day at 4:20pm and use the phrase “4/20” to refer to consuming cannabis.
The lingo spread widely via the group’s association with the rock band Grateful Dead.
Fast-forward to 2024 and April 20, written as 4/20 in US and Canadian date form, is now considered the official marijuana holiday globally.
And both cannabis lovers and investors alike have much to celebrate this year with it widely anticipated that cannabis will be rescheduled as a lower-risk drug in the United States ahead of the November presidential election, seen as a precursor to federal legalization, and marijuana companies’ fortunes are seeing a turnaround.
Rescheduling is the big focus of 2024.
The Drug Enforcement Administration is currently considering a recommendation from the Department of Health and Human Services recommending marijuana be rescheduled from a Schedule I to Schedule III drug, which would be a symbolic win for the sector in addition to opening up research opportunities and tax benefits for cannabis operators, among other positives.
“This year could see major federal reform for the first time,” analysts at Jefferies believe.
“Rescheduling is looking very likely, SAFER banking prospects are looking strong, and we should also see a revised Cole Memo. We continue to assume federal legalization in 2028.”
On the industry side, after a slowdown in US retail industry sales in 2022, cannabis sales saw strong growth of 12% in 2023 driven by new recreational states coming online and increased traction as pricing pressures ease.
The Jefferies analysts see industry growth remaining strong, forecasting 10.1% growth from 2023 to 2026 and 9.1% into 2033.
They added that underlying demand remains “very healthy,” with estimated same-state sales across 11 US states expected to grow 29% in fiscal 2023.
“Another reason to be bullish is looking at expected earnings before interest, taxes, depreciation, and amortization (EBITDA) growth of US cannabis versus other relevant consumer sectors, where it impresses,” they wrote.
“In our view, current multiple headwinds are not being driven by fundamentals but instead by technical factors, specifically the lack of access to institutional capital/liquididy. We believe these technical headwinds will finally likely be addressed positively, one way or another.”
With assumed improved institutional access and liquidy in the near term, the analysts reiterated their ‘Buy’ rating on all cannabis companies in their coverage, with top picks being Curaleaf (TSX:CURA) Hldgs Inc. (CSE:CURA, OTCQX:CURLF), Cresco Labs Inc. (CSE:CSE:CL, OTCQX:CRLBF), and Green Thumb Industries Inc. (CSE:GTII, OTCQX:GTBIF).
They see TerrAscend Corp. (CSE:TER, OTCQX:TRSSF) and Cannabist Company as having the greatest chance of upside surprises but are less convinced about Ayr Wellness Inc. (CSE:AYR.A, OTCQX:AYRWF) and Trulieve Cannabis Corp. (CSE:CSE:TRUL).
“With the likely federal reform, all eyes will be on whether this finally provides a path to uplisting,” they wrote.
“If not the case, rescheduling could still trigger greater institutional interest. If interest does spike, expect others to restructure (like already done by Curaleaf and TerrAscend) to at least get on the TSX.”
They added that Canadian operator Canopy Growth (TSX:WEED) Corporation (TSX:WEED, NYSE:CGC) has benefited from US reform optimism and has no technical barriers to ownership.