- The blue line on the graph shows the price of the MSOS ETF, the most widely followed cannabis equity price index, from its inception in September 2020. The dates of the last four SAFE Act passages, along with the initial unveiling of the Schumer/Booker proposal for comprehensive cannabis federal legalization, are marked.
- The MSOS index has risen an average of 8% in the weeks surrounding the last four House passages of the SAFE Act. The gains have been short-lived as the realization of the unlikely Senate passage sank in.
- The 8% average gain is rational if we think of it as the expected benefit from passage, times the probability of passage. One might, for example, postulate a 75% gain on Senate passage and a 10% probability leading to an expected increase of 7.5%.
- The potential for 75% stock price gains on the SAFE Act passage is not fantasy. The Act would significantly increase the liquidity of cannabis stocks by allowing banks to provide custodial services for cannabis equities. Similarly, the major exchanges might feel emboldened to enable the up-listing of cannabis stocks. The resulting inpouring of institutional cash would likely boost cannabis multiples back to the 12x EBITDA levels they carried in late 2021, reflecting our analysis of other industry multiples and our DCF analysis.
- The green line on the right side of the graph depicts this scenario, to which we ascribe less than a 20% probability. It requires the Democrats to thread the needle between the social equity demands of their progressive faction and the business-oriented desires of the centralist wing. Moreover, the Bill would have to be passed in the lame duck session after the midterms, and many competing concerns like inflation and recession are likely to be top of mind. It is difficult to handicap what impact the midterms will have on this calculus.
- The purple line on the graph is our most likely case scenario, to which we ascribe a probability of around 70%. We see prices leveling near their recent lows after a brief period of optimism. The red line represents a downside case of continued price erosion, perhaps fostered by challenged operating margins.
- We do believe some version of the SAFE Act will eventually pass, representing the most likely compromise of the interests of States, MSOs, and financial institutions. Full federal legalization is still years away at best. The unspoken truth is that too many constituents would be losers in federal legalization, including most MSOs and virtually all limited license states. Conflicting interests will continue to make finding a compromise difficult.
