"Reschedule it"

Peter Tosh re-records "Legalize it" for the 2024 Elections *

Last week I took a trade that I frankly didn’t expect. I took a position in a cannabis stonk as well as exposure on the MSOS ETF. I wasn’t intending to share this to be honest. It’s a bit too meme-y for my taste and frankly I don’t like the space or the product itself. But in the end, I decided to write it down for the sake of sharing the thought process and having a little bit of fun along the way. Plus, it would be a unique opportunity to introduce a new audience to Peter Tosh and I couldn’t let that go to waste.

So what triggered me?

A smart friend of mine started discussing the rescheduling of cannabis during 2024 but also mentioned that none owns cannabis stocks anymore except retail. It’s like he threw a bait at me. Well I fell for it and went down the rabbit hole.

I recalled that Bofa’s Hartnett had a 2024 outlook piece where he was listing the most contrarian trades, titled “the Contrarian Cs: Commodities, China & Cash.”

Shrubstack readers know that China is a “Contrarian Consensus” trade, which may explain why it never goes up :/

So what if “Cannabis” is a “C” that is a non-Consensus Contrarian trade?

Background

First things first, a little background: Marijuana is currently classified as a Schedule I drug, which is the same category as LSD and heroin. In 2022, Biden launched the process to review how marijuana is scheduled under federal law. On 29 Aug 2023, this led to a recommendation by the Department of Health and Human Services (HHS) that the DEA should move marijuana from its current status in Schedule 1 to Schedule 3 of the Controlled Substances Act. Schedule III drugs include “drugs with a moderate to low potential for physical and psychological dependence” such as ketamine, testosterone and Tylenol with codeine.

The DEA will have the final authority to make any changes to marijuana’s scheduling, and it will go through a rulemaking process that includes a period for the public to provide comments before any scheduling action is finalized.

This could take place in the next few months.

FYI, in the US, cannabis is legal in 38 states for medical use and 24 states for recreational use. So it’s quite weird to a European like moi why this is still a debate, but it is what it is.

A small parenthesis: the fully unredacted letter of the HHS to the DEA was released on 12th Jan 2024. There were a few interesting details in it, but one of them struck with me: The FDA basically recognized conclusive evidence for the use of cannabis in the treatment of pain. As per Politico:

That’s a big change because marijuana’s position in Schedule I indicated that the federal government believes there is no indication of medical use for marijuana — and this review unequivocally counters that.

(FYI, the FDA found the impact on other conditions to be inconclusive + some other bad stuff e.g. adverse effect on treating PTSD).

The important point here is that you have the HHS and the FDA now giving positive feedback to the DEA … in an election year.

IMPORTANT CAVEAT: These processes usually take A LOT OF TIME. So I wouldn’t be surprised if the timetable slips. As mentioned above, as part of the rescheduling process is that the topic is opened to public consultation. Can you imagine how many questions they will receive on this?!

What does this mean?

The easy narrative is that rescheduling could help the up-listing of cannabis stocks to major exchanges and allow institutions to invest more easily in cannabis stocks.

But the part I didn’t appreciate is that these companies are subject to “280E tax restrictions”, which prohibits them from deducting many normal business expenses on their federal tax returns i.e. they pay tax on GROSS profit.

Lets put it simply: the effective tax rate of these companies can be >80% ! (Compare that to the US corporate tax rate of 21% or other companies in the US that sell social media drugs, like META which pays 5% :/)

Rescheduling would mean that Section 280E no longer applies.

If we use some simple Mafs, we can readily conclude that by removing the 280E restriction, the net income of these companies goes up by 2-3x!

Technicals

The MSOS is has only been around since 2020, so I’m sticking with the daily chart.

I like this ridiculous long base that it’s forming and that it’s trading above the 200dma. It fits my narrative so I’ll go with it.

Just an FYI that these companies issued A LOT of new shares so they diluted everyone on the way down. I wouldn’t expect this index to ever go back to its previous all time Hiiiiigh (sorry, the pun was too good to skip)

Incentives Incentives Incentives

I saw a poll that 9 out of 10 Americans say marijuana should be legal for medical or recreational use .

This is an Election year. In the last election of 2020, rescheduling Marijuana was a key pillar of Biden’s platform.

Basically, when 90% of a country supports rescheduling AND you promised it AND it’s possible to get it done, well … there’s a higher likelihood that it will get done.

What I’m sayin’ is that everyone is motivated to get this through the finish line before year-end.

The “when” is the question-mark for me and I don’t have the answer. But there’s 11 months left to Election date.

Incidentally, another weird factoid I learned during my research: there’s >400k jobs in the legal cannabis industry, surpassing dentists and pilots combined. That’s a lot of votes!

Summary

I saw an event-driven trade that has a catalyst in 2024, that not many people talked about, that has a “funny-mental” angle and where the technicals looked ok.

I haven’t gotten into the “weeds” of the situation yet (get it? get it?) in terms of single names, so I chose the path of least resistance as I did with Biotech back in November (“Rosemary’s Baby”) and went mostly with the ETF for now and in a structure where I found the risk-reward to be attractive. I also bought a single name that looks great on paper for a multi-bagger potential, and I need that sort of trade in my book to keep me excited! (back in November, I bought into the CRISPR names alongside XBI, having the same feeling).

And again it’s worth reminding: THIS WILL TAKE TIME! I wouldn’t be surprised if this trades like “It’s so over” and then “We are so back” a few times in 2024 so I’m mentally prepared for it and sized accordingly. I also note that this moves +/- 10% on a daily basis sometimes, so I may end up trading this until the elections.

And then there’s definitely the risk that the timetable spills over beyond the election date, in which case the new administration may have a different view on rescheduling and then you’ll be left with big bags that won’t get back “HIGH” again for a long time (oops I did it again).

*A note to the younger readers: the title is a word play on Peter Tosh’s masterpiece “Legalize It”. You can use it as the soundtrack to this Shrubstack and listen to it here

Disclaimer:

This isn’t financial advice.

This is the trading blog of a shrub.

By now you should know: Don’t be Stupid.

Like, seriously … Don’t be stupid …