Back on January 31, I suggested in Cabot Cannabis Investor that it made little sense to chase cannabis stocks in the strong rally at the time. I suggested waiting for declines of 2%-4% to start buying.
Now, impatience with the lack of news flow on the next expected catalyst has brought substantial declines in cannabis stocks that are buyable.
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Since January 31, the AdvisorShares Pure U.S. Cannabis (MSOS) has fallen by over 9% and the AdvisorShares MSOS 2X Daily (MSOX) is down by over 20%.
This is a good pullback to buy. I won’t be able to call the exact bottom in this pullback. Or if I do it will only be by sheer luck. No one can precisely call bottoms or tops in sectors or stocks on any regular basis. You should run away from anyone who claims to have a system that can do this. The way I manage this challenge is to buy in stages and average in.
But buying now means buying ahead of a major potential catalyst that has not gone away. The precise timing is unknown. My guess is that it could hit between now and the end of April. It will come in the form of a proposed rule from the federal government on rescheduling cannabis under the Controlled Substances Act (CSA).
The background here is that the Health and Human Services Department (HHS) has asked the Drug Enforcement Agency (DEA) to soften its stance on cannabis by downgrading it to Schedule III from Schedule I under the CSA. The change would help cannabis companies by boosting cash flow enormously.
The reform would boost cannabis company cash flow by exempting companies from an Internal Revenue Service rule (called 280E). This bars the deduction of operating expenses against Schedule I drug revenue.
The Next Step
Now, the next step in rescheduling will come in the form of a proposed rescheduling rule from the DEA. The timing is critical, from the all-important political perspective. The proposed rule has to drop by March or April, for the Biden administration to reap election-year boasting rights – obviously part of the plan here. When the DEA drops the proposed rule, that will be another sign of rescheduling progress, and so it will be another cannabis sector group catalyst. But the rule needs to come out by March or April to allow enough time for comments and hearings needed to approve rescheduling before election day, or at least inside the current administration.
Some recent poll results suggest the Biden administration is likely to press hard for progress on cannabis rescheduling as an election tactic. The two key polling insights for cannabis investors are: 1) A vast majority of voters back cannabis reform, and 2) Cannabis reform is an even more salient issue for young voters who are defecting from Biden.
There’s also a wildcard catalyst on the horizon that may push cannabis stocks up near term, though I put less credence in this one. Once again, rumors are circulating that Congress may act on the Secure and Fair Enforcement Regulation Banking Act (SAFER). This would help cannabis companies by making it easier for banks to serve them. The problem here is that predictions of progress on this bill have been so wrong for so long, it’s tough to get excited about them this time around. I don’t fault the analysts and lobbyists for making this forecast. They are only doing their jobs. But they have a tough job, since it’s so hard to predict what politicians will do next.
The Bottom Line
Given the way younger voters are defecting from Biden, you can imagine the Biden camp may be pushing hard for timely progress on cannabis rescheduling. The poll results and simple logic on the possible timing suggest a DEA-proposed rule could drop soon, catalyzing the cannabis sector once again.
The Best Cannabis Stocks to Own
Because my Cabot Cannabis Investor portfolio is in the right stocks, as of the end of January it was trouncing the general market and the cannabis sector. It was up 35% for the year, more than ten times the 3% gain for the S&P 500. It was also up more than twice the 14.5% gains in the New Cannabis Ventures Global Cannabis Stock Index and the ETFMG Alternative Harvest exchange-traded fund (MJ).
To find out what stocks to own to capture this kind of vast outperformance, and the right time to buy them, consider subscribing to Cabot Cannabis Investor.
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