VIRIDIAN INSIGHTS

• Are cannabis equities behaving rationally concerning the prospects of the SAFE Act passage? The MSOS ETF price graph shows how muted the rally has been, and we think that is appropriate. The ACT’s impact would be more symbolic than actual, at least in the near term. Most public and private cannabis companies already have access, albeit at high costs, to banking services, and that aspect of the SAFE Act doesn’t strike us as being particularly significant. However, we believe the SAFE Act would eventually lead to uplistings and greater trading liquidity, which would have tangible benefits, particularly for larger MSOs. Major banks are unlikely to storm into the market on the lending side, given the cash flow challenges poised by 280e and wholesale price compression. At the margin, lending may loosen, but this needs to be viewed against the backdrop of general credit contraction, an upcoming recession, and high drama regarding the debt ceiling. Frankly, it is remarkable that with these issues facing the country, the ACT is even getting a hearing, but maybe the eighth time is the charm.
• We are seeing a dramatic price uplift in some of the most beat-up cannabis markets, including Michigan and California. Some industry watchers attribute this to increased law enforcement, but we are skeptical. The prospect of a new war on drugs being effective, particularly in Democratic-controlled states, is implausible. Enforcement has never worked in the past, and it is unlikely to be effective now. Instead, we see market forces at work. The failure of a significant number of competitors with the temporary attendant reduction in supply is the likely agent for the increased pricing and tight supply conditions. Will that last? Yes, for one outdoor crop cycle, and then we will see.
• The 10-year minus 3-month yield spread at -176bps has become less inverted by four basis points, and the regional banking crises seems to have drifted out of the headlines for a week. However, none of the issues have been solved. The Fed has a three-sided problem; taming inflation is only one side. The Fed has aspirations beyond taming the inflation rate. Its fundamental goal is to tame the all-asset price bubble produced by a decade of zero interest rates. To achieve that goal, the Fed is not only not afraid of a recession but practically requires one. The market is naïve to think the Fed is going to pivot quickly. A Fed near-term pivot would be pretty terrifying; in our opinion, it would signal that the Fed perceives an imminent threat of banking contagion or severe economic weakness. Brinksmanship over the debt ceiling adds extra drama.

• We are heading into earnings season again, with many cannabis companies releasing Q1 results in the weeks ahead. We are not as focused on the beats or misses in these reports as in the revisions to the 2023 and 2024 estimates that result. We are looking for a flattening of the curve below, showing downward revisions to 2023 revenues and EBITDA for 15 of the largest MSOs. Since March 31, several companies have had significant downward revisions to consensus EBITDA estimates, including 4Front (FFNT: CSE), down 11.8%; Cresco (CL: CSE), down 6.1%; Jushi (JUSHF: CSE), down 8.3% and Curaleaf (CURA: CSE) down 17.6%. Aside from the psychological boost of the SAFE Act drama, it is hard to see a real price resurgence as long as these estimates are revised downward.