Cannabis Chart of the Week: Is the SAFE Banking Act’s Sixth Charm Charm?

On July 14, 2022, the United States House of Representatives passed the National Defense Authorization Act, which incorporated the SAFE Banking Act. The law has been passed six times by the House of Representatives without a vote in the Senate.

The blue line in the chart shows the price of the MSOS ETF, the most followed cannabis stock price index, as of its inception in September 2020. The data from the last four SAFE Act passages, along with the first disclosure of the Schumer/Booker proposal for a comprehensive federal legalization of cannabis, are marked. The MSOS index has increased by an average of 8% in the weeks surrounding the last four Chamber Passages of the SAFE Act. The gains were short-lived as the realization of the improbable Senate passage slumped. The average gain of 8% is rational if we consider it the expected benefit of passage times the probability of passage. For example, one could assume a 75% gain on the passage of the Senate and a 10% probability leading to an expected increase of 7.5%. The potential for 75% price gains on the SAFE Act passage is no fantasy. The law would significantly increase the liquidity of cannabis stocks by allowing banks to provide custody services for cannabis stocks. Likewise, the major exchanges may feel encouraged to allow for the up-listing of cannabis stocks. The resulting influx of institutional money would likely return cannabis multiples to the 12x EBITDA levels they had at the end of 2021, reflecting our analysis of other industry multiples and our DCF analysis. The green line on the right side of the chart represents this scenario, to which we attribute a probability of less than 20%. It requires the Democrats to thread the needle between the social equality demands of their progressive faction and the business-oriented desires of the centralist wing. In addition, the bill should pass in the lame duck session after the midterms, and many competing concerns such as inflation and recession are likely to be at the top of the agenda. It is difficult to say what impact the interim tests will have on this calculus. The purple line in the chart is our most likely scenario, to which we attribute a probability of around 70%. We see prices moving close to their recent lows after a brief period of optimism. The red line represents a downward case of continued price erosion, perhaps fueled by challenged operating margins. We believe that a version of the SAFE Act will eventually be passed, which represents the most likely compromise between the interests of states, MSOs and financial institutions. Full federal legalization is years away at best. The unspoken truth is that too many voters would be losers on federal legalization, including most MSOs and virtually all limited-license states. Conflicting interests will continue to make it difficult to find a compromise.

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The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker provides the market intelligence cannabis companies, investors and acquirers use to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raising and mergers and acquisitions in the legal cannabis, CBD and psychedelics industries. Every week, the Tracker aggregates and analyzes all closed deals and segments based on key metrics:

Deals by industry sector (to track capital flow and M&A deals through any of 12 sectors – from cultivation to brands to software)

Deal structure (equity/debt for capital increases, cash/inventory/earnings for M&A) Status of the company announcing the transaction (public vs. private)

Clients of the transaction (issuer/investor/borrower/acquirer) Key deal terms (pricing and valuation)

Key deal terms (deal size, valuation, pricing, warrants, cost of capital)

Issuer/buyer/seller location deals (to track capital flow and M&A by state and country)

Credit ratings (leverage and liquidity ratios)

Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions worth more than $50 billion in total.

Image via Pexels, edited by Benzinga.

The preceding article is from one of our external contributors. It does not represent Benzinga’s opinion and has not been edited.

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