April 20 being what it is – a “420” celebration of marijuana – the day was packed with cannabis product launches and clever marketing tie-ins – like the “$4.20 Snack” from Carl’s Jr.
Of course, there was political grandstanding, as well. At a special 4/20 event in Washington, D.C., Senate Majority Leader Chuck Schumer (D-NY) vowed to “work like hell” to advance cannabis reform.
Fittingly, cannabis stocks promptly sank by 3%-6%, in reaction.
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The sell-off in response to Schumer’s fresh vows was no surprise. After all, cannabis investors were badly burned last December when promised reform in Washington, D.C. fell through at the last minute. Cannabis stocks sold off by 40% or more, and they’ve never looked back.
The dour mood is understandable. Despite robust sales growth in places like Michigan and continued progress on legalization in big states like Minnesota, federal reform remains the key driver of cannabis stocks. That’s because it would open the way for listings on serious stock exchanges, and institutional investor interest in the space.
A regression analysis by Curaleaf (CURLF) as part of its accounting overhaul found that news on federal legislation was really the only thing that mattered for its stock price.
So, the key question for cannabis investors remains the same. Is there any hope for reform from Washington, D.C.?
The consensus answer is “no.” Hence the sector’s 4/20 sell-off – despite renewed promises from Schumer and other politicians.
But in investing, when a consensus view permeates the landscape so much that it is priced into stocks – as is the case with cannabis – the real question for investors is how the dynamic might change. Here are a few possibilities, for cannabis.
First, a stripped-down version of banking reform may return. Cannabis companies face serious challenges since they can’t enjoy banking services because cannabis remains illegal at the federal level. A perennial “SAFE banking” proposal in Washington, D.C. would fix that. But politicians continue to fail to pass it. There is still a chance they might make progress this year.
“SAFE banking seems like the low-hanging fruit,” cannabis investor Todd Harrison said in a 4/20 interview with AdvisorShares, which manages cannabis exchange-traded funds. “It should be introduced in the Senate in the next few weeks. If there is a will there is a way, and I think there is a will,” said Harrison, the founder of CB1 Capital which invests in the cannabis space.
Sen. Sherrod Brown (D-OH), who chairs the Senate banking committee, confirms his panel will soon hold hearings on a simplified version of SAFE banking that strips out criminal justice reform angles opposed by conservative lawmakers.
Thus, SAFE banking proponents now pitch the reform as a “safety” measure, since getting rid of the cash-only nature of dispensaries makes them less of a crime target. “Framing the bill as a public safety measure could help, but the hurdles are high,” says TD Cowen Washington, D.C. analyst Jaret Seiberg.
Next, two long-shot developments could help.
One would be a revamp of the so-called Cole memorandum. Back during the presidency of Barack Obama, attorney general Jim Cole issued a memorandum stating the government would not enforce the federal prohibition on marijuana in states that made it legal. This boosted sentiment towards the group, and encourage cannabis businesses to flourish. This policy got rescinded by the next administration. Now, Attorney General Merrick Garland keeps hope alive that he will issue an updated version of the Cole memorandum. That could still happen.
Another possibility is a legal concept called nullification. Basically a “use it or lose it” provision, nullification means the federal government has given up its right to ban cannabis because it is not enforcing cannabis laws. “The problem is this requires a case to get to the Supreme Court,” says Seiberg. But since it is a well-established legal principle and the federal government has obviously failed to enforce cannabis laws for so long, any progress on this front by cannabis advocates could shift sentiment towards the group.
“Congress has a lot of work to do to catch up with the rest of the country,” Schumer said in his 4/20 day speech. “Congress is behind the rest of the country on this issue.” No kidding. A nullification drive could preempt Congress and render its foot-dragging irrelevant.
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