Despite a double-digit rally at the end of last month on promising rescheduling news, cannabis stocks (as measured by the AdvisorShares Pure U.S. Cannabis ETF (MSOS)) have pulled back since the beginning of April and are down 11% since then.
This is not entirely unexpected given recent volatility in the markets. As a more speculative sector, cannabis often experiences outsized moves relative to the broader markets when investors become more sensitive to risk.
But meaningful progress on a major catalyst and signs of resurgence in a second suggests cannabis stocks are a buy in the current bout of sector weakness.
Here’s a little background on these two catalysts.
1. The U.S. Department of Health and Human Services (HHS) has recommended that the Drug Enforcement Administration (DEA) and the Department of Justice (DOJ) move marijuana to Schedule III from Schedule I of the Controlled Substances Act (CSA). The DOJ has issued the proposed rule, and we are now in a 60-day public comment period that precedes a final rule.
2. The Senate may soon rekindle efforts to approve cannabis banking law reform, known as the SAFER Banking Act. The change would allow banks to serve cannabis companies, which currently have to deal with the burden and safety issues of operating in cash only. As I outline below, lawmakers on both sides of the aisle have recently suggested we may see progress soon.
I think we could continue to see progress on these catalysts. A key cannabis reform proponent in the House of Representatives recently predicted this year’s “4/20” day will be the last one with marijuana designated as a Schedule I drug under federal law. “This is the year that I think we can break the federal logjam,” said Rep. Earl Blumenauer (D-OR) who is co-chair of the Congressional Cannabis Caucus.
Blumenauer was also positive on the potential for progress on cannabis banking reform. He predicted the Republican-controlled House would take up the Secure and Fair Enforcement Regulation (SAFER) Banking Act if the Senate gives it a thumbs up. Senate Majority Leader Chuck Schumer (D-NY) recently reiterated that SAFER Banking Act remains a priority. Some political analysts speculate bank reform proponents may try to put cannabis banking reform in a Federal Aviation Administration (FAA) funding bill. Current FAA funding is set to expire on May 10th.
“Every day we’re closer on SAFE Banking,” said Blumenauer. “Negotiations are ongoing in the House and Senate, and we are, in fact, making progress. I’m quite confident that if we’re able to break this loose in the Senate, which looks increasingly likely, it won’t be a problem in terms of ultimate consideration in the House,” he said. Rep. Nancy Mace (R-SC) recently said Republicans in the House should approve the bill if they want to remain in control of the chamber. Mace has long urged Republicans to use cannabis as a wedge issue to attract voters from the left.
Politicians have good reason to support these reforms. A new poll finds that most people support cannabis legalization and rescheduling.
A Data for Progress poll recently found that the majority of voters, including Republicans, support cannabis legalization. The survey found that 75% of Democrats, 54% of Republicans and 67% of Independents favor legalization. The Data for Progress poll confirms the results of a recent Pew Research Center poll which found 90% of people in the U.S. think cannabis should be legal for recreational or medical purposes.
The new Data for Progress poll also found that 59% of voters support rescheduling cannabis under the Controlled Substances Act. It says 60% of Democrats support the change, as do 52% of Republicans.
The bottom line: Cannabis stocks have risks, but they look attractive in the market. For more detail on other bullish trends and the best names to own, consider subscribing to Cabot Cannabis Investor.
