Investors losing confidence in cannabis for variety of reasons

The SAFER Banking Act is seen as more important than Florida's full legalization legislation by the investor community.

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It's no secret that getting investors excited about the cannabis business has been tough for over two years now, and things haven’t gotten any easier in 2024. A new report shows that confidence among investors is still on the decline.

According to a survey from ATB Capital Markets, both U.S. and Canadian investors are losing some of their enthusiasm for the legal marijuana industry. A big reason for this is the long wait for U.S. federal cannabis reform and the failure to push through excise tax reform in Canada.

The survey, conducted between Aug. 29 and Sept. 5 with 22 institutional investors, revealed that only about 31.8% of them are feeling optimistic about multistate operator (MSO) cannabis companies in the U.S. This is a steep drop from 83.3% in the spring. Meanwhile, 39% of Canadian investors are taking a bearish stance after the country’s efforts to change marijuana tax laws fell flat—up from 29% in the spring.

In ATB’s summary, they noted that sentiment towards MSOs has turned neutral. Most investors now say that something big—like being listed on major stock exchanges rather than the pink sheets or Canadian exchanges—would be needed to spark more interest in putting capital into the sector. Federal U.S. cannabis rescheduling is also a major event investors are waiting for.

The survey shows that if MSOs were allowed to list on major exchanges, over 59% of investors would likely put more money into them. And if the federal government finally reschedules cannabis, almost 32% of investors would follow suit.

Interestingly, investors rank potential recreational marijuana legalization in Florida lower on their priority list than the SAFER Banking Act, which would benefit the entire industry. About 27.3% of respondents placed the banking bill as their second-highest priority for investing in cannabis, while only 13.6% ranked Florida’s legalization as their second priority.

But it’s not all bad news. Around 68% of investors believe the U.S. will complete cannabis rescheduling by mid-2025, especially now that former President Donald Trump has endorsed the policy change initiated by the Biden administration in 2022. With Trump’s support, it seems more likely that cannabis will be reclassified to Schedule III from its current Schedule I status.

ATB’s findings show that if cannabis does get moved to Schedule III, most investors (53.3%) expect the MSOS ETF to rise to over $20, which would be a growth of 191.5% from its current price of $6.86. A Trump win in the next election isn’t seen as a major risk factor here.

The biggest concern investors have about rescheduling is that a judge might put an indefinite hold on the process.

Oddly enough, even though investor sentiment is shaky, most (59.1%) still believe Tier 1 MSOs are undervalued, echoing ATB’s belief that these companies are still fundamentally undervalued. ATB highlighted Green Thumb Industries, Trulieve Cannabis Corp., and Verano Holdings as their top picks in the sector.

In Canada, the outlook isn’t much better. Investor sentiment has worsened due to the government’s failure to approve excise tax reform this year. ATB pointed out that the Canadian market is grappling with market share instability and slower growth, with most companies struggling to turn a profit. However, there are still a few companies doing well and trading at attractive prices, such as SNDL Inc., which ATB recommends as a top pick among Canadian cannabis businesses.