Cannabis Markets

Is Federal Cannabis Legalization Here?

Sometimes, timing is everything – even if the outcome is uncertain.

We’re less than a month away from cannabis’ all-important holiday: 4/20.

For more than five decades, the event has been celebrated around the globe by legalization advocates, cannabis aficionados and run-of-the-mill “good-time Charlies.”

But a question has been bubbling to the surface the last few years: Is this the last 4/20 that cannabis will be illegal at the federal level?

A lot has changed in this country over the past decade.

There’s been a groundswell of support to end federal prohibition in the U.S. And many states have taken up legalization themselves. More and more join the ranks of pro-cannabis states each year.

In fact, there are only a handful of states that don’t have some form of legal cannabis today.

 

This has created a booming new industry. And it’s raking in tens of billions of dollars in annual sales.

But with a major announcement last week, are we on the precipice of a federal change? One that would unlock tens of billions of dollars more in revenue?

Pot Stocks Crash From Highs

For many investors, cannabis seems like a shoo-in.

States have launched medical and adult-use markets. And legal cannabis sales in the U.S. rose 40% last year to more than $25 billion.

On top of that, many of the largest publicly traded multistate operators are reporting more than $1 billion in annual sales – some even approaching $2 billion.

But pot stocks haven’t had much to cheer this year.

The AdvisorShares Pure U.S. Cannabis ETF (NYSE: MSOS) is down more than 23% year to date.

And it has tumbled more than 50% over the past year.

Individual American multistate operators have fared even worse. And shares of licensed Canadian producer Canopy Growth Corp. (NYSE: CGC) are down more than 75% in the last 12 months.

The revenue and growth reported at the industry and company levels are poisoned by the swamp gas billowing out of Washington, D.C.

Federal legalization remains elusive, and the issue remains politically divisive.

In recent days, the tone has shifted, though.

Shares of Canopy Growth have rocketed more than 30% higher since March 14, and shares of fellow Canadian licensed producer Tilray (Nasdaq: TLRY) have soared more than 50% since then. And shares of Sundial Growers (Nasdaq: SNDL) have blasted more than 60% higher in the past two weeks.

But to me, these moves highlight the blind euphoria and idiocy that’s dogging cannabis investors and the industry.

Is There MORE Left in the Tank?

It seems like every step forward is met by a roadblock.

In 2019, the Secure and Fair Enforcement (SAFE) Banking Act became the first pro-cannabis piece of legislation to ever receive a floor vote in the U.S. House of Representatives, let alone pass the chamber.

A couple of months later, the Marijuana Opportunity Reinvestment and Expungement (MORE) Act followed in the SAFE Banking Act’s footsteps, clearing the House Judiciary Committee.

But it wasn’t until December 2020 that the MORE Act passed a full House vote.

After only an hour of debate, the bill was approved by a wide margin, 228 to 164.

The MORE Act not only is a sweeping social justice reform measure but also decriminalizes cannabis at the federal level. It would essentially do for cannabis what the 2018 Farm Bill did for hemp.

Equally important, it would free cannabis companies from the destructive Section 280E of the federal tax code. This prevents cannabis businesses from taking tax deductions for ordinary business expenses.

Now, those historic passages by the House of Representatives are fine and dandy.

But neither the SAFE Banking Act nor the MORE Act have advanced in the Senate. They haven’t even been voted on, despite the fact that Democrats control both chambers of Congress.

However, that didn’t stop investors from plowing into cannabis shares when the news hit that the House is preparing to vote on the MORE Act once again.

There is little question the MORE Act will clear the House.

Every piece of pro-cannabis legislation introduced in the last three years has been greenlit by the lower chamber.

And Senate Democrats are expected to introduce their own pro-cannabis legislation next month.

But pump the brakes on expectations… There is little doubt in my mind that both pieces of legislation will die in the Senate.

The Senate is a graveyard for pro-cannabis efforts.

The SAFE Banking Act died there, as did the MORE Act.

For now, the desire to stall, stonewall, delay and send cannabis bills to molder is pervasive among Senate leaders.

But that doesn’t mean investors can’t use these upcoming votes as short-term trading catalysts.

We’ve seen shares of Canopy, Tilray and Sundial surge on the news. And that’s despite the fact that Canopy and Tilray don’t have cannabis operations in the U.S. All publicly traded, licensed producers are still barred from operating in the States.

Don’t get caught up in the hype.

Federal legalization in the U.S. always takes far longer than we want to believe. In the meantime, states will continue to lead the charge on the expansion of the U.S. cannabis market.

Take the long-term view and build your position in American multistate operators at lows.

Prohibition will end eventually. But not this week. And not by this year’s 4/20.

Here’s to high returns,

Matthew

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