As the momentum for federal legalization continues to build … you should be looking for one type of marijuana company

Last Thursday, Washington D.C. Mayor Muriel E. Bowser (D) announced legislation to legalize and regulate recreational marijuana dispensaries in the nation’s capital … and it’s setting up a potential showdown with the federal government.

Right now, D.C.’s marijuana laws are mixed. Residents are permitted to grow and possess small amounts of the marijuana due to a 2014 voter-approved law. But they can’t legally purchase marijuana, nor can the city government tax sales. Why?

A provision in the federal budget that prohibits the District from enacting or enforcing any marijuana legalization laws.

So, with this legislation, Mayor Bowser is basically thumbing her nose at current laws and the federal government … in the government’s own backyard.

***Regardless of how this plays out, the real story is how it’s one more illustration of the growing pressure on the federal government to enact meaningful marijuana reform

From Rolling Stone:

“It’s not a question of if we’re going to get a federal law,” says Sen. Ron Wyden, a Democrat who represents pot-legal Oregon and is the ranking member of the Senate Finance Committee. “It’s a question of when.”

Pressure is coming from all areas — an increasing number of states are enacting their own reform legislation … a majority of Americans now support marijuana legalization … nearly every democratic 2020 presidential hopeful supports marijuana reform … a large group of congressmen/women are calling for federal banking reform measures as they relate to the marijuana industry … CBD businesses are selling their products despite murky laws prohibiting it …

We even have Attorney General, William Barr, calling the current marijuana situation in the U.S. “intolerable” just last month. He went on to say that the Justice Department is currently reviewing the recently reintroduced STATES Act (Strengthening the Tenth Amendment Through Entrusting States Act). This legislation would allow individual states to enact their own marijuana laws without federal interference.

At this point, the reform-pressure has reached a critical velocity. There willbe measures of federal legalization, it’s just a matter of waiting out the obligatory backroom-meetings and glad-handing that will lead to whatever political posturing accompanies the reform.

And when that happens, the market is going to explode. Research firms estimate the U.S. market for legal marijuana products will reach $20 billion next year alone. That’s up from a mere $5.4 billion in 2015. And by 2030? The size will skyrocket to $75 billion. Within that, certain sectors will see even more growth — for instance, the CBD market is expected to explode 40-fold over the next decade. Simply put, the investment wealth created by this rate of industry growth will be staggering.

***So, what’s the timing of federal legalization?

It’s anyone’s guess … while it could be months away, “any day” wouldn’t be a surprise.

Why?

For that answer, I’m going to turn to Matt McCall, editor of Investment Opportunities. Matt is our resident marijuana expert. While a great many other analysts are just now jumping on the marijuana bandwagon, Matt has been a leader in the space since 2014.

Given his experience and understanding of the industry, many of Matt’s early recommendations have soared hundreds, even thousands of percent. That’s why Matt’s opinion holds a great deal of weight in the industry.

Matt begins his explanation of timing by referencing the recent announcement that Canopy Growth (a Canadian company) is buying a U.S. based marijuana company called Acreage Holdings. I’ll let Matt take it from here:

I knew right away that the deal would only make sense if marijuana were legal in the U.S. After all, if Canopy bought Acreage while marijuana is illegal federally, the world’s largest pot stock would have to delist from both the New York Stock Exchange (NYSE) and the Toronto Stock Exchange.

There was no way the company would ever do that, so my initial reaction was that Canopy must know something I did not — that U.S. legalization must be a near certainty … and probably a lot closer than many anticipate.

I looked into the deal further, and it became clearer that Canopy likely had unique insight into the future. As I mentioned in the alert I sent you on April 18, Acreage’s Board of Directors includes three of the most important people on the planet: former U.S. Speaker of the House John Boehner, former Massachusetts governor and current presidential candidate William Weld, and former Prime Minister of Canada Brian Mulroney.

The knowledge and connections of those three men are unparalleled. Canopy’s due diligence had to be extensive, and the evidence must have been so compelling that the company determined it was time to plant its flag in the U.S.

***What’s the next domino to fall that we should be looking for?

That’s where things get a bit murkier. But I’d guess we’ll be looking for passage of the STATES Act. Additional meaningful reform seems to be anchored on this.

To illustrate why, take the SAFE Banking Act (Secure and Fair Enforcement). This legislation would clear the way for traditional banks and financial institutions to service marijuana companies (which, currently, is considered illegal).

At present, the SAFE Act has been approved by the House Financial Services Committee. It’s now waiting placement on the calendar for a full House floor vote. That would seem to make it a likely candidate as being the next domino to fall.

But last week brought news that Sen. Mike Crapo (R-ID) might be a roadblock to its passing. He was quoted as saying:

As long as cannabis is illegal under federal law, it seems to me to be difficult for us to resolve this … This is something that the Department of Justice deals with before congressional action … I cannot make a commitment as to whether we will take up legislation yet because we want to see how we can resolve this difference between criminal law and our financial law.

So, where is the Department of Justice on the issue? Well, that ties us back to Attorney General William Barr, whom we referenced earlier, calling the current marijuana situation “intolerable.” And his stance, as pertaining to some form of legalization, points toward support of the STATES Act. Here is Barr, from U.S. News:

… I think the way to go is to permit a more federal approach so states can make their own decisions within the framework of the federal law, so we’re not just ignoring the enforcement of federal law.

***But don’t wait for legalization before you act.

In Matt’s most recent issue of Investment Opportunities, he describes what is likely to happen after legalization by looking at how this situation played out in Canada.

He points toward Canopy Growth. It went public in Canada in 2014, yet it took two years before the stock began its parabolic rise.

Back to Matt:

The chart below shows Canopy’s market cap along the way. During the first half of 2014, the company was worth a mere $20 million. By September 2015, it had tripled but was still valued at just $61 million. Today, Canopy Growth is worth nearly 300 times that at $16.9 billion.

 

This one company already created billions in wealth for its shareholders. There are many more Canadian marijuana companies that have grown from microcap stocks worth less than $100 million to valuations well above $1 billion.

With marijuana illegal in the U.S., stocks based here are still in the earlier part of that chart. There are major limitations on how marijuana companies do business. These limitations result in the stocks trading at a major discount to their Canadian peers.

Matt then describes this difference in valuation. Specifically, he points toward the price-to-sales ratio, noting how U.S. based marijuana companies are trading for significantly lower valuations. How significant? Matt tells us even the most expensive U.S. stock (Cresco Labs) trades at one-third the value of a “cheap” Canadian stock like Tilray. Back to Matt:

In general, U.S. stocks are valued at about one-tenth of their Canadian peers. This is absolutely crazy to me. And I absolutely love it because it’s a huge opportunity.

The California marijuana market alone is bigger than all of Canada … and it’s growing. If and when U.S. legalization occurs, this country will immediately become the largest market in the world. In fact, it will be bigger than the rest of the world combined. Even if legalization takes longer than I anticipate, the gap in valuations will lessen in the next 18 months. That’s why U.S. marijuana stocks are one of the best buying opportunities in the entire market, not just the cannabis sector.

As to specific investment opportunities, Matt is now focusing on those smaller U.S. companies that are in position to see the biggest market gains as reform finally takes hold. If you haven’t invested in the marijuana industry, this would be a good way to begin constructing a portfolio. But Matt tells us there is a cautionary note:

Please don’t wait until the major news outlets run stories about legalization. Don’t wait until your neighbor and co-worker are talking about legalization. And definitely don’t wait until legalization is a done deal.

The really big money is made by investors who are able to buy early. My entire investment career has been about this. Buying ahead of the legalization of marijuana could be one of the best investments you make in your life.

In one last note, a separate congratulations to Matt and his subscribers for banking even more gains. This past Friday, one of the marijuana stocks Matt has recommended, Turning Point Brands, hit a new 52-week high.

Since Matt added the stock to his Marijuana Boom portfolio in August, it’s climbed 53%. It’s just another in a string of winners for Matt and his subscribers. And from the looks of it, there’s plenty more to come.

Have a good evening,

Jeff Remsburg