The Bulls Overcome The Bears; Re-scheduling Is A Catalyst…And An Overhang?

The ATB Cannabis Investor Sentiment Survey – Spring 2024 returned responses from 20 institutional investors collected from April 8 through April 12, 2024. Highlights include:

Bullish On MSOs
The sentiment towards MSOs continues to improve, with 83.3% of respondents reporting being more bullish now as compared to six months ago (up from 65.2% in our Fall 2023 Survey), and 61.1% of respondents reporting increased net exposure over the past six months (up from 39.1% in our Fall 2023 Survey). Notably, no respondent reported being more bearish or decreasing net exposure (vs 8.7% and 26.1%, respectively, from our Fall 2023 Survey). 

Re-scheduling As A Catalyst And An Overhang
Investors are confident that rescheduling will materialize in 2024, assigning a 75.9% probability to this event. Most investors also expect the DEA to propose rules in Q2/24. Counter-intuitively, despite the more-likely-than-not and sooner-than-later view on re-scheduling, 83% of investors are “worried” or “very worried” that it might not happen this year. We think this paradoxical view reflects the industry’s track record of regulatory false starts, such that re-scheduling is simultaneously seen as an imminent catalyst and as an overhang while it does not materialize, which helps explain the market volatility upon news headlines (we view much noise and little signal in these headlines). As such, the impact of rescheduling, for the most part, appears to not have been priced in by the market; upon re-scheduling, 85% of investors believe the MSOS ETF would rise to a level of $20 or higher (reflecting a minimum ~118% increase from the current level of $9.18). 

Up-listings To Attract More Capital
Listings on major US exchanges (namely the NYSE and/or NASDAQ) was ranked by 73.7% of respondents as the #1 factor that would increase their willingness to allocate more capital to MSOs. In our view, this indicates that trading liquidity and regulatory barriers for other institutional investors to get involved in the sector are key concerns for cannabis investors. We think that up-listings would largely solve those issues, but there is a low probability this could happen in 2024 (investors assigned a 31.0% probability to this event). 

Mixed But Improved Sentiment On Canada
Investors reported a mixed sentiment on Canada, which is an improvement from our Fall 2023 Survey. The same portion of investors (29%) reported becoming more bearish and more bullish on Canada as compared to six months ago (vs 36% more bearish and 7% more bullish in our Fall 2023 Survey). Accordingly, 21% of respondents reported an increase in net exposure to Canadian cannabis names over the past six months (up from 7% in our Fall 2023 Survey), and 7% reported a net decrease (down from 27% in our Fall 2023 Survey). Interestingly, respondents indicated that regulatory changes in the US is the key factor that would incentivize a higher allocation towards Canadian cannabis, followed by a reduction in the Canadian excise tax (which we now know is unlikely to occur in 2024). We think investors are hopeful that, upon regulatory changes in the US, certain Canadian companies would be able to rapidly enter that market.