Cannabis stocks are down 80–90% from their all-time highs, and most investors have walked away. But could that set the stage for one of the biggest contrarian trades in years? In this insightful interview, WindRock Wealth Management’s Chris Casey tells Maggie Lake why he believes the cannabis sector is now trading like a distressed asset in a high-growth market.
Despite being a $30B+ industry with widespread legalization in over 40 U.S. states, cannabis companies remain federally shackled by restrictive tax rules, blocked banking access, and a ban on interstate commerce.
But that may be about to change. Two major catalysts could rewrite the entire investment case:
- Federal rescheduling of cannabis, removing it from Schedule I classification
- The SAFER Banking Act giving financial institutions the green light to serve cannabis businesses
Key Topics:
- Why cannabis stocks crashed and what could turn them around
- The three federal-level obstacles crippling the industry
- How rescheduling and SAFER could unlock a wave of capital and efficiency
- The role of big alcohol, tobacco, and pharma in a post-legalization world
- Why Chris Casey sees this as a “call option on reform” with 2x to 6x upside for market leaders
- The M&A and consolidation potential when the floodgates open
Concerned about Markets? Get a free portfolio review with Chris Casey and his team at WindRock here: https://bit.ly/3JbMxo7
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Chris Casey 0:00
Whenever something’s beat up this much, 90 plus percent, I view it as a call option. It’s a call option on a high growth industry for distressed companies, and I can’t think of a better place to be.
Maggie Lake 0:15
Hello and welcome to wealthion. I’m Maggie Lake, and joining me today is Chris Casey, Founder and Managing Director of wind, rock, Wealth Management to talk all things cannabis. Hey, Chris, it’s great to
Chris Casey 0:26
be with you again. Yeah, likewise. Maggie, good to see you.
Maggie Lake 0:29
Cannabis is such an interesting sector. I’m really excited for this conversation, because there was so much enthusiasm a few years ago and then so much disappointment. So why is it back on your radar?
Chris Casey 0:41
Well, you’re right. The enthusiasm primarily happened during the lockdowns when, apparently everyone was stuck at home, unemployed and just using cannabis, because there was a big spike. If you look at all the stocks, there’s big hype about it. I’m looking at it right now because I think it’s pretty rare where you’re able to buy Well, effectively, are distressed businesses in a high growth industry, and that’s the way I look at it. We’ve always been believers in contrarian investing, meaning you find a mispricing in the market, but then the key is identifying a catalyst that’ll change that mispricing. I think we have one here. I think there’s a couple of things that could come down the pike that could really reverse the fortunes of some of these companies.
Maggie Lake 1:18
Yeah, so let’s, let’s take a step back, though, because I definitely think they’re going to be some going to be some people listening who probably haven’t had exposure to cannabis, and maybe they weren’t one of the people in lockdown who were, you know, discovering it for the first time. But there was this, this, there was a swing, I think, in terms of kind of recognition, but certainly from an investment point of view. Why? What happened that got so many people interested in sort of chasing those stocks? Why did so many companies pop up and stuff? I’m assuming that it’s something to do with legalization, but talk to me a little bit about the history before we jump into what’s happening now. Yeah,
Chris Casey 1:56
and it’s appropriate to put in the context historical context of what’s happened to cannabis over the years. So obviously, it’s been illegal for some time, but not that long. I mean, like alcohol, it’s it was prohibited for some time, but starting in 1920s is when social appropriation people were against it. 1937 marijuana tax act effectively illegalized. And certainly 1970s the Controlled Substances Act put it as a schedule one drug, which is fairly preposterous situation. That’s that means it has no medical value, and it also means it’s highly addictive. It’s on there along with heroin, whereas things like cocaine and methamphetamine are scheduled to right now, starting in 1996 that’s when California first passed a medicinal legalization of marijuana, and it was followed up. It was by ballot. It was followed up in 2012 also by ballot, with Colorado that a lot approved recreational for so anyone could use it, right? You don’t have to prove some sort of medical reason. And since that time, we’ve had a number of state legislatures as well as ballots legalize a number of different states. So we’re currently at around 40 states that have legalized in some form, additional otherwise, and about 24 of those states, including as well as DC, allow recreational use. So it’s completely illegal. What that means, population wise, in the US is that we have about, let’s call it, about 75% of the population has access to recreational cannabis, and over 50% has access I’m sorry, 75% has access to medicinal and over 50% has access to recreational so it’s it’s changed quite a bit over the years, but again, it still is considered illegal by the federal government. It is a schedule one drug in the eyes of the DEA, and so therefore it does presents real difficulties for these companies in their operations.
Maggie Lake 3:47
So it’s so interesting because, and that last line you said, is really important, because I think on a state level, it’s been changing, right? And I and certainly from a societal point of view, I don’t know, because of that, or the stage change as a result of it, you definitely see changes in attitude. I just was, I just was listening to some earnings reports from some of the big beer distributors, right? Some of the big beverage conglomerates and their traditional sales are down. And one of the reasons cited by the analysts was that a lot of people have turned to cannabis because it’s legal and it’s it’s more their preference. So, you know, from a from a sort of consumer point of view, it certainly seems like it’s changing, but what you just said is that’s happening only at that level. On a federal level, it’s still sort of criminalized and considered an illegal, dangerous drug,
Chris Casey 4:37
that’s correct, and yet it’s still a pretty big industry, as you mentioned. And by the way, the social acceptance, as well as the investment acceptance, has grown quite a bit over the years. I mean, now you see, you know, grandparents who have never thought about doing this, you know, they’re using THC type products on their elbow, you know, for golf elbow or what have you. No, they’re always, they’re always looking for medicinal reasons. Let’s put some numbers to it, though it’s a big. Industry, it’s around, I believe, 30 billion in sales last year, United States put that in context Canada, which is all legal, it had around 5 billion. But if you adjust it from a population perspective, it’s probably about 40 billion in sales equivalent to the US. Alcohol is over 100 billion, and tobacco is probably around 85 billion. So although it’s only at 30 billion, there’s a lot of room to grow. Some forecasts, I saw some articles. They put it at 2025, sales at anywhere from 30 or, I’m sorry, 35 to 45 billion. So there’s a lot of growth that’s expected in this industry. If
Maggie Lake 5:37
you have any questions about how to navigate the current environment, wealthion can help connect you with a vetted advisor to get a free portfolio review, just click the link in the description below or head to wealthion.com/free there’s no obligation, and it will just take a few minutes of your time. Again, that’s wealthion.com/free so what are the what are the companies that are participating? So are they public? Are they private? What? What is the nature of them? I think we’ve all seen the shops popping up everywhere. If you live in a state where it’s legal, you’ve certainly probably seen that with your own eyes. But what is the nature of the companies that make up this sector?
Chris Casey 6:16
Yeah, there’s, well, obviously it’s both public and private. But as far as public companies, if you count the Canadian and American exchanges, there’s probably 10 to 12 cannabis so called cannabis companies, a very varying stages of so called pure play, right? They may have other operations too, but of those 10 to 12, they tend to be fairly large, meaning they have operations. And let’s call it six to 12 states, they may have several 100 retail centers. They probably have two dozen grow centers. We’re actually producing the product to sell into those retail locations. Valuation wise, because everything’s sold off quite a bit, they don’t look that bad from kind of a high level review. So price to sales valuations are somewhat reasonable. Most of them are below one time sales. They have profitability at the gross profit margins. So the kind of highest operating or profit margin you can look at and their liquidity is not that bad either. There are solvency issues, there’s negative cash flow issues, but in general, it’s it’s not a bad valuation from valuation perspective or liquidity perspective or from a gross operating perspective. It’s not that bad as far as operationally so,
Maggie Lake 7:30
why, you know? Why have they what’s the performance been like? I’m assuming, certainly from my perspective, I used to get tons of questions about this sector. There were a lot of people playing in a lot of retail playing in it, as well as a lot of institutional interest in it. And I used to get tons of questions, and it seems like so many people have just been, you know, scared out of them, are flushed out of them, because it’s been so difficult. So what does the performance look like? You just mentioned the potential for growth. So what’s weighing them down? Like? What are some of the issues? What’s What does the stock performance look like?
Chris Casey 8:04
Well, as far as the stock performance, it’s been atrocious. And this is why people don’t look at it or even want to talk about and frequently that’s a good test. Is when you should be looking at investment right where no one wants to hear about it. And that’s what we have right now with cannabis. I mean, cannabis, since, let’s call it the the lockdown period when they had not necessarily all time highs, but that did quite well. They’re off since then, or from their all time highs. Let’s call it, on average, probably 8090 plus percent. So it’s real devastation, and a lot of that’s happened over the last 12 months. Over the last 12 months, you’ll see returns that make up the bulk of that, where they’re down 70 80% so it’s really been a horrible industry the end or stock performance. The industry itself is hamstrung by three key factors, and hopefully these are resolved, which is where I think the opportunity is. One, I could go into each of these in detail, but one is that they have a burdensome tax regime that they operate under so effectively right now, according to Section 280 E of the IRS Code, these companies are only allowed, ironically, to deduct inventory, so they can’t deduct so they can deduct what’s illegal, supposedly, but they can’t deduct what’s legal, meaning payroll, rent, utilities, that kind of stuff. So they’re getting effectively taxed at their gross margins, which is effectively horrible tax rate for all these companies, right? So that’s, that’s one big impediment. Two would be they’re not able to operate across state lines. I mean, think about that for a second. What other industry could survive and yet not be able to operate across state lines? I can only think of, historically, a couple. One was banking, and it was the banking’s detriment, right? The 19, I believe 27 McFadden act prevented banks from having branches in other states, in which case have caused portfolio concentration. So like in Illinois, if you’re a bank operating under that law, you would be exposed, have exposure to farmland and manufacturing. You couldn’t branch out across state lines. So that is. Big impediment. Now, when that changes, eventually there’s some amazing things are going to happen. It’s not just efficiency. So right now, yes, there’ll be efficiencies where they can have one growth center servicing maybe five state plus states. But more importantly, it changes the nature of their production and distribution. Right Think of how many different industries in agriculture are grow something in a greenhouse, right? Maybe flowers, and a lot of those are imported, I believe, from Columbia. So what other industry really has that it’s a terribly inefficient way to grow things. Eventually, Kentucky and Virginia should have fields of cannabis instead of fields of tobacco. They’ll be the low cost providers. Eventually, it also changes. You’ll have online distribution. And that sounds shocking now, like, how could you allow cannabis to be going across state lines, being delivered from an online purchase? Well, that already exists. Actually, it exists because the 2018 farm act where, as long as derived from hemp, you can do that. Again, that’s inefficient, because hemp doesn’t have a lot of THC, so there’s a lot of great factors that can happen from being able to operate across state lines. On top of that, the third big impediment for them is the access to capital. As you know, any growing industry needs capital. They need capital for working capital requirements, and they need money for capital expenditures right to expand their operations. They’re either a locked out of capital right now or B, the terms are fairly onerous. So I did like a survey of like all the announced debt deals for public companies to see them at 10 plus percent in interest. That’s just the basic terms. Who knows what other you know covenants they have, how restrictive they are. Who knows if there’s an equity kicker? I don’t know, but it’s so bad right now that banking industry, they may have access to a credit union, they may have access to a regional bank. However, if you’re going looking at a nationally chartered bank, the problem is, is that these banks won’t lend to you. They won’t even lend to real estate companies if they have a tenant that’s in the cannabis space. So it really is a huge burden. And again, the very fact that this industry exists, the very fact that it’s at 30 billion in sales, is a testament to its resilience and the potential of the industry.
Maggie Lake 12:15
Yeah, that was that’s what I’m thinking about. And the banking part of it, the inability to bank basically as a business, I know is what a lot of people have been thinking about as the Holy Grail, if you can, if you can change that, that is as the big sort of road bump. But you just mentioned two other really important ones. But as I listen to you, I’m thinking, how, how have they been able to survive? I mean, it’s so it’s, it sounds like it’s almost impossible to function at any kind of scale given those challenges,
Chris Casey 12:44
and that’s why it’s severely detrimental to growing the business, severely detrimental just to profitability. And that’s why, as you mentioned earlier, investors are just turned off, and they really haven’t looked at it, but I think they should re examine it, because I think there’s some things coming down the pike that could change that dramatically.
Maggie Lake 13:00
Yeah, so what? But by the way, talk about battle tested. I mean, if they’ve survived now, they’re coming from, you know, such a, as you say, such a sort of resilient posture that that that seems attractive, um, even in downturns in the future. I mean, if this is what they’ve had to deal with. But what do you think’s about to change? Why? Why now? Do you think that something is going to sort of help clear away some of this. Yeah,
Chris Casey 13:22
and by the way, when things do change, that’s not to say they won’t still have their problems, because you can anticipate, like they had in Canada, plunging cannabis prices, right, which, if you’re a high cost operator, may be difficult to operate in, and other things like that. Firms that aren’t well branded, that’s key, too. As far as what changed, there’s basically two potential changes I think are on the horizon. One is rescheduling now in, I believe, October of 2022 the Biden administration charged the DEA and Department of Homeland Security with with examining or considering rescheduling cannabis, which is kind of a preposterous idea. It’s kind of like because these are vested interests in keeping it illegal, right? It’s no different than if you had put the ATF in charge of firearms deregulation, right? It’s never going to happen, right? So what happened is that everything is stalled. There is a process that’s outlined to reschedule drugs. They’ve they’ve started the process, but the latest it’s, basically suspended right now. The latest development was they’re supposed to have a hearing back in January. They never had it. I don’t know when they will have it. So things have bogged down. However, as you probably would agree with this current president, at any given moment, you could get a 3am social, you know, true social text that says, As of now, I’ve Donald J Trump, I’ve ordered the you know department of the DEA to reschedule this immediately, which would be great. But again, because it’s it doesn’t comport with the facts how it’s currently rescheduled. However, if they do reschedule it, frankly, it should not be on the schedule at all. But if they do reschedule it, I don’t want to see him move it to like schedule two or three. They really need to bump it down. A bit. Yeah,
Maggie Lake 15:01
only changes the margin. So, just so, just so we’re clear we’re referencing this before the scheduling refers to what it’s classified as in terms of drugs. So right now, it’s in a schedule or in a classification with extremely dangerous drugs like heroin. It’s sort of at the top of the heap. Advocates would like to see it pulled all the way down to something much more sort of medicinal in nature, sort of take it out of the sort of criminal realm, and put it, put it, schedule it differently, right,
Chris Casey 15:31
absolutely. And I think basically the facts line up with fact that it absolutely should be rescheduled regardless what you feel. And this is not a commentary on the drug war. It’s not a commentary on drug use or anything like that. But the facts are, it has medicinal qualities, and it’s far less if it is addictive at all, which most people would say it’s not, it’s far less addictive than these other drugs. Certainly, I would imagine, if cocaine and methamphetamine are scheduled to you got to go below that, right? It’s got to be so just to be clear, it’s it’s scheduled higher than them, yeah, it’s considered worse than, the eyes of federal government, than those two drugs. Those two drugs along with
Maggie Lake 16:03
but you touched on something really interesting. I just want to stay here for one moment, because this is where it’s I think part of why it’s stalled is because the conversation isn’t just from a sort of scientific point of view. It’s not just from an investment point of view or a tax revenue point of view, which, by the way, a lot of states would like to see the tax revenue, you know, come in from this. It’s, it’s very caught up in cultural and, you know, policing and all. There are all these other threads in there, right? All the people who are in jail because of possession of marijuana, if you suddenly reschedule it? Do you have to retry all yeah, there’s a lot. There’s a big knock on effect that’s politicized to this conversation, I think, which is part of why there is a delay. Does it seem like there’s momentum to resolve that? And again, we’re not saying what’s right. We’re just talking about the sort of particulars of this, if you’re trying to think of it from an investment point of view. Do you feel there’s some momentum?
Chris Casey 17:03
Chris, I say there’s not momentum, per se, and you’re right. There’s a ton of vested interests, and it’s basically a quagmire of a process, right? So they, you know, they want, they solicit opinions on all these different special interest groups, and they got to wait for that. It’ll be another year. So it is kind of a quagmire. That’s why I think the current administration is key, because, as we know, Trump is will go off on his own and do things he wants to do. He also will do things that kind of avoid this systemic procedures that are in place. I can easily see him bureaucracy. So, yeah, let’s, let’s get this done now. I could see that happening. The other item now that whether or not that happens, there is some also some relief for cannabis companies, from a legislative perspective, from Congress. And so right now, there’s what they call the SAFER Act. SAFER Act is the newest iteration of some cannabis laws previously known as the SAFE Act. It’s in the Senate. Basically the SAFER Act gives immunity to banks and so they can deal with cannabis companies, if they so choose. Now that did get out of committee back in 2023 however, nothing’s really developed. Has yet to hit the floor. But again, that’s something I could see Trump working with congressional leadership and arguing that that needs to be changed right now. Now we should temper these thoughts with the fact that we all thought Biden was going to do something as well, right? But I think right now we have a general consensus from both aisles of Congress that something should be done. So hopefully we start seeing some movement on both those fronts.
Maggie Lake 18:35
And as you point out, we’ve we have precedent here, because I just was going over some of the details of the genius act and some of the changes that are being suggested from the SEC around digital assets. And they’re much more far reaching and than some thought. So they seem to sort of be moving fast, clearing the way, you know, moving out some of the agenda of of this sort of change much more quickly than anyone who watches Washington, Washington would have thought so there is a precedent sort of removing fast and sort of, you know, correcting course in a way, and resolving some of these long standing tensions. It’s on the flip side of all the challenges. I mean, again, I come back to that line You said before that 40 something states have now legalized this so from a, you know, from a state versus federal perspective, it’s sort of on the ground, already happening. Does that mean that it maybe is easier now, in a way that it wasn’t some years ago, when you didn’t have so many states lined up on the same side of this issue,
Chris Casey 19:35
absolutely. I mean, now you’re at the point where the federal government would be acknowledging a fact versus pushing through an agenda, right? This is the way it is. Like I said before, 75% of Americans have access to cannabis, so that’s an existing fact. So it’s kind of silly in a way, for them to keep pushing these agendas where you can’t operate across state lines, where they supposedly there’s no medicinal value. And. Um, that’s going to change, I think, whether it’s this year or later on, I don’t know, but the potential, everything’s probabilities, right? And the probability, I’d say, is pretty high. Something happens in the next year or
Maggie Lake 20:10
so. So this brings me to a really good question, which is time frame. So you’re very much looking at it early, because we haven’t seen the news. It will be priced in before it actually happens, right? And we, you know, haven’t really seen these stocks moving. So time frame wise, this sounds like not a six month investment, but but a longer term bet that we’re on the cusps of something happening.
Chris Casey 20:35
Potentially. It’s hard to say, um, my personal point of view, when everything, when anything is beaten up, as bad as these stocks are, if they’re not, unless there’s a going concern aspect to it. I mean, I would strongly consider companies that are market leaders. You can almost, you can’t. You really use a Graham Dodd type security analysis on these companies, because although they have some decent operations and financial metrics at the high end, ultimately they’re mostly negative cash flow, right? So that’s not going to work. So you want to buy market leaders and stuff, and again, it could be two years from now, but it could be overnight. I mean, Trump could do this, and he’s talked about on the campaign trail, and things can change very, very quickly. So whenever something’s beat up this much, 90 plus percent, I view it as a call option. It’s a call option on a high growth industry for distressed companies. And I can’t think of a better place to be
Maggie Lake 21:26
interesting. You just brought up a really good point about so there’s a thought as you say that I’m sure people are thinking, wow, if we see a change like this for these, this kind of beat up company, you could see some really big gains on the back of that. You know, we’ve seen what happens when you clear hurdles like this. But that means that doesn’t necessarily mean an all clear, because then it’s sort of the the everyday business challenges you have, especially with a rapidly changing sector industry, and you just mentioned something like, you have to be branding. You have to think about those kinds of things that maybe these companies haven’t had to do, right? That’s
Chris Casey 22:02
true. I mean, it could be largely, you know, small markets are highly regulated, where you have barriers of entry, etc, they haven’t had to. I remember touring for investment purposes, touring a growth center and a retail shop in Colorado, probably in like 19, I’m sorry, 2000 it’s called 16 or so, so about four years after his recreational illegal in Colorado, and you could tell back then, no one here has ever worked at retail shop because the spacing was horrible. It looked like, you know, like a 1950s Bulgarian, you know, store where there’s nothing on the shelves. The displays were terrible, like no one knew had any idea what they’re doing. That’s changed. That’s changed quite a bit. So yeah, there’s, there are different challenges once it becomes legal, a whole host of different challenges, which is why you gotta look at the industry as whole, not necessarily pick one, try to pick one or two winners, because that landscape will be vastly different once things are either we have the SAFER Act passed, or we have true rescheduling, or meaningful
Maggie Lake 22:59
rescheduling. Do you see a lot of consolidation immediately if that were to happen, since it sounds like the system created all these small players because of the barriers of going across state lines, et cetera, do you think that, in addition to the kind of rapid changes, that there’d be a lot of consolidation? Maybe another reason to watch out on individual names, as opposed to sort of an ETF that follows the sector. Yeah,
Chris Casey 23:22
I could definitely see some consolidation. Because what you can see happening is that if these events happen, if these catalysts are implemented, and if the landscape changes, it’s much more beneficial for these companies. Well, I would expect the stock prices to pop and just to put some perspective to it, if these stock prices even got to their 52 week highs from where they said today you’re looking at depending on the stock probably two to six times return on your money. That’s how dramatically they have fallen recently, right? So, yes, once these catalysts were implemented, if all of a sudden their stock prices popped. Now they got some, some money they could play with. Right now they have, they have shares, share prices they can use to buy some private companies. So I wouldn’t be surprised if there’s a massive consolidation that happens. That’s not to say there’s going to be, not going to be plenty of startups, but you’re going to have also legitimate companies go into we’ve already seen that with tobacco. We’ve already seen that with alcohol. They’ve already had some some true investments over the years, but I’m sure they will jump in, and it’s only a matter of time before those cigarette companies, like I said, if you ever driven through Kentucky or Virginia, those fields, are going to look very different in a couple of years
Maggie Lake 24:29
wild. And that was I mentioned before, without thinking about it, the fact that the beverages have seen a decline. So tobacco is one, but you could see other sort of companies in that space. So there might be more than one way to play this, I suppose. Have you heard about any, any of the sort of beverage companies thinking about going out because they’re putting tch in beverages? That’s another sector that did well as traditional beer consumption declined?
Chris Casey 24:55
Yeah, not just that. Yes, I do certainly see that. But think of all the medicinal. I mentioned earlier, someone using a transdermal topical agent for muscle soreness or something like that. I think that’s gonna be very common. You’re gonna have doctors that will start they’re not recommending anything like this right now, maybe under a table, like, hey, go get yourself some of this. I’ve seen do wonders for other people in this condition. It’s gonna start happening. It’s gonna happen quite a bit
Maggie Lake 25:19
amazing, so fascinating and so great to have this kind of conversation. So early on, what do you think? Do you think the average investor is exposed to this? Like, what do you think who, who, who owns these stocks? Now, if anybody, what do you think exposure, typical exposure is, I’m guessing, not very high, right?
Chris Casey 25:37
Well, it’s, it’s not very high for a couple reasons. One, I can’t imagine a registered investment advisor like we are. Besides us, I don’t know how many are really out there telling their clients to consider cannabis. Probably not many. Secondly, for retail investors, you can’t necessarily buy it. So for instance, I have a friend I just mentioned, hey, we’re investing X number of stocks is what we’re buying for in the cannabis industry. And he’s like, I can’t buy it from my custodian. They won’t let me buy it. You know, it has nothing to do with the type of account he has or the amount of money that’s in there. They just have a blanket ban on it. So a lot of retail investors have not invested in it. And then third, the ones that have were probably in it years ago because they really liked the story. The story was the exact same back then, but for the fact that I think the likelihood of these catalysts being implemented are stronger now, and if they’re in then, as everyone knows, it’s ever been in a stock that goes down 90% it’s the last thing you want to talk about, right? No one wants to hear anything about cannabis. If you lost 90% your mind, no one wants to hear anything about it. No one’s going to double down. It’s just
Maggie Lake 26:40
human nature. Yeah, yeah. Fascinating stuff. Well, it sounds like it is something that we all ought to be thinking about, or at least have on our radar, so we appreciate you bringing it to our attention. Chris, fantastic stuff.
Chris Casey 26:51
Well, thank you, Maggie. As always,
Maggie Lake 26:53
if this is something you’re thinking about you want to check in on your finances, you can head over to wealthion.com/free, and connect with one of our advisors in the network who will do a free portfolio review for you. Chris, fantastic stuff. I look forward to the next one. Thank you so much.
Chris Casey 27:07
You got it. Thanks.
