Cannabis industry stocks regained momentum in July. According to the Global Cannabis Stock Index, released by New Cannabis Ventures, the sector recorded an 8.2% increase so far—far outperforming the S&P 500, which rose only 1% in the same period. 

However, the overall scenario remains in decline: in the accumulated 2025, the cannabis index falls 21.1%, while the S&P 500 advanced 7.3%. Market analyst Alan Brochstein, founder of the 420 Investor community, suggests the recent enthusiasm should be approached with caution, especially concerning MSOs (Multi-State Operators), the major multi-state cannabis operators in the United States.

In an article published this week, Brochstein warns in an article on  New Cannabis Ventures: “Owning MSO stocks is essentially betting on the elimination of 280E taxation. And that, at this moment, seems increasingly unlikely.”

Section 280E of the U.S. tax code prevents companies that sell federally illegal substances—like cannabis—from deducting common operating expenses, representing a significant tax burden for the sector. The expectation of a federal reclassification of the plant, which would eliminate this limitation, was stronger at the end of 2022. Today, Brochstein assesses that there is little chance of changes in the short term.

Decline in Confidence and Reduced Exposure

In his model portfolio, Brochstein reduced exposure to MSOs to just 12.4%, a number similar to the new weighting of the global index, which also shrank after the June rebalancing. Currently, only three MSOs are part of the index: Glass House Brands, Green Thumb Industries (GTI), and Trulieve.

Despite the downturn, the analyst acknowledges that some of these stocks are cheap. Among the "Big Five"—Cresco Labs, Curaleaf, GTI, Trulieve, and Verano Holdings—he highlights Verano as the cheapest relative to its adjusted EBITDA. Still, he emphasizes that most face serious financial difficulties. AYR Wellness, for example, has already suffered a 67% drop in 2025.

The best balance sheet among the large MSOs, according to Brochstein, is GTI's. But even it is traded at a premium above its tangible book value. Glass House Brands, which recently issued preferred shares, stands out for still maintaining a higher index, although the analyst considers it “expensive.”

Other Risk Factors

Beyond the tax burden, Brochstein points out other structural challenges: the slow pace of state legalizations, the post-pandemic demand contraction (especially in western states), and the fragility in the hemp market. “I am a big fan of hemp, and three MSOs operate in this segment, but I do not see it as a relevant driver for these stocks,” he states.

He also mentions the possibility of federal legalization or reclassification but notes that if it happens, it will not be soon. “There will be entry opportunities if that happens, but until then, the scenario remains adverse,” he analyzes.

Mergers, Acquisitions, and State Limits

Brochstein also sees little room for a wave of mergers and acquisitions among the giants. An example cited is the unmaterialized case between Cresco Labs and Cannabist (Columbia Care), thwarted by state regulatory hurdles. “Some states limit the number of retail stores or cultivation size, which can make larger deals unfeasible,” he explains.

Despite the critical tone, the analyst does not rule out opportunities in other areas of the market. “I see more potential in ancillary stocks and some licensed producers (LPs) in Canada. I wish the best for cannabis investors—but they should be aware of the risks.”

With information from New Cannabis Ventures