Cannabis companies see room for growth with reclassification

For several years, we have maintained a significant investment in the cannabis sector, holding shares of Canopy Growth (CGC) and Tilray Brands (TLRY). As previously noted, our entry into these investments was early, resulting in negative returns. However, the underlying trend remains positive, as cannabis use continues to gain popularity. In fact, Cannabis use has recently outpaced alcohol use.   See the chart below:

Current regulatory environment: 

Recently, the administration requested that the Department of Justice (DOJ) and the Drug Enforcement Administration (DEA) reclassify marijuana as a Class 3 substance. This action would reduce the existing legal constraints and facilitate the future expansion of cannabis use within the United States. The administration's emphasis on the medical applications of cannabis holds significant importance. We anticipate a series of positive outcomes in the coming months and years that are not yet fully reflected in cannabis stock valuations. Furthermore, eliminating the burdensome IRS 280E tax rule would likely increase corporate profits and cash flow. Schedule III classification would also make the sector more attractive to institutional investors, potentially leading to increased capital inflows, higher valuations, and reduced financing costs.

Impact on Canopy Growth (CGC) and Tilray (TLRY):

Canopy and Tilray have deep-pocketed support and beverage synergies.

Strong brand portfolio: Both Canopy and Tilray own multiple cannabis brands across recreational and medical segments, giving them broad consumer reach.

Strategic acquisitions: Canopy has a history of acquiring cannabis companies and wellness brands, expanding its footprint and product diversity.

Beverage & CBD synergies: Both Tilray and Canopy have partnerships in cannabis-infused beverages and CBD wellness products, which will diversify revenue streams beyond flower sales.

Cost-Cutting & Restructuring: Both management teams have been aggressively reducing costs and streamlining operations, aiming for profitability.

Institutional Interest: Potential to increase if legalization occurs; ETFs and funds could put capital into CGC and TLRY, driving demand for the shares.

Scarcity of Players: Few cannabis companies have Canopy's and Tilray's size and global reach. In a legalized market, this scarcity could drive valuation higher.

After all these years, we are starting to see signs of legislative and market strength that could increase demand for cannabis company stock. We remain very bullish.