OUTLOOK

• Cannabis stock prices (measured by the MSOS ETF) are now off 71.8% YTD and trading at multi-year lows. We expect a bottoming of prices to occur as year-end tax loss selling is completed.

• We, sadly, do not see any near-term catalyst to propel a price recovery in early 2023. Senator Schumer announced that he would “do his best” to work on SAFE in 2023 but given his track record, his announcement provided little comfort for the market. We continue to be skeptical that 60 votes are present to push the bill through on a stand-alone basis, despite our belief that SAFE with a little + is probably the best the industry can expect in 2023. This year’s vital issue is that no legislator feels that his political career rests on his cannabis vote. And that tells us that very little is likely to happen anytime soon. Value investors will continue to creep into the market, but we expect this to occur slowly, given the recent blood bath.

• Attention and hopes have turned to descheduling/rescheduling, but we are skeptical of this happening in 2023, although technically, it could happen at any moment. We are cynical enough to think Biden may keep that in his back pocket for the election. The public has forgotten that on the campaign trail, Biden revealed his belief that cannabis should be on schedule 2. This change would have little near-term benefit for either the top-tier MSOs or the liquidity-starved tier 3s and social equity participants. One unintended consequence it might produce is to allow cannabis companies access to Chapter 11 bankruptcy proceedings, a move that might accelerate the consolidation of the industry.

• Meanwhile, commoditization-driven pricing declines, inflationary cost increases, an impending recession, and a restricted capital market continue to grind on the industry with no end in sight. Both large and small operators are tightening their belts with enhanced cost controls, tighter working capital management, and reduced capital spending plans. These moves are necessary and appropriate but will result in somewhat attenuated growth. Restructuring is likely to be the new M&A of 2023.

• The good news is that this period of belt-tightening and consolidation will result in a healthier industry better positioned to face legalization challenges when and if it arrives. And fundamentally, cannabis stocks are still incredibly cheap. The problem is finding the catalyst that will change that.