Last Wednesday, the House of Representatives’ Judiciary Committee passed a vote bringing us closer than ever to legalization

What a difference a week makes …

Last Monday’s Digest began like this:

It’s not official, but as I write, Forbes reports a key congressional committee plans to hold an historic vote on a bill to end the federal prohibition of marijuana this week.

And so, what happened?

The vote took place on Wednesday … it passed … and cannabis stocks exploded.

Take Canopy Growth, one of the stocks we profiled in that Digest. It shot up 42% on the news …

 

 

Or we could look at Aurora Cannabis, also mentioned in last Monday’s Digest, up 37% …

 

 

And these weren’t one-off, isolated gains. The broad marijuana industry as a whole popped higher.

To illustrate, we can look to the Alternative Harvest ETF, which holds a wide basket of marijuana stocks. It jumped 15% on the news …

 

 

Now, these stocks pulled back later in the week, which is to be expected. Markets need to digest major moves like this, and some short-term traders are taking profits. But as I write Monday morning, they’ve steadied and are pushing higher.

Stepping back, there’s no way to interpret last week’s vote, and the subsequent market reaction, as anything other than great news for marijuana investors and the future of the industry.

So, in today’s Digest, let’s detail what was in this vote, what it means, and where we go from here.

 

***For the first time ever, a body of the U.S. Congress voted to end cannabis’s nearly century-long status as a federally prohibited substance

To help us walk through last week’s historic vote, I’m going to turn to Matt McCall, InvestorPlace’s resident marijuana expert. Matt has been a leader in the space since 2014.

Here’s how he introduced last week’s big news to his subscribers:

We’re one step closer to the ultimate catalyst that could send cannabis stocks soaring to historic highs.

I’m talking about full legalization within the United States, the world’s largest cannabis market.

On Wednesday, the House of Representatives’ powerful Judiciary Committee voted 24-10 to advance the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act.

The MORE Act would remove marijuana from the federal Controlled Substances Act. This means individual states would be free to enact their own cannabis laws without any fear of federal interference or repercussions.

***Part of the reason the MORE Act vote passed is because it’s not just a vote about marijuana legalization in a vacuum

It also reflects a growing belief that marijuana arrests have unfairly targeted certain minority groups. Many politicians want to undo this damage, so it’s backed by a broad coalition of civil rights, criminal justice, drug policy, and immigration groups.

Here’s Matt for more:

The bill would introduce a 5% federal tax on cannabis sales. And the revenue would be used to fund job training, and legal aid for people who’ve been impacted by prohibition, and small business loans for those who are socially or economically disadvantaged.

Here’s how The Hill puts it:

This legislation seeks to address the millions of Americans who suffer from the stigma and lost opportunities associated with a low-level marijuana possession conviction. It provides funding and inducements to states to enact policies that expunge these criminal convictions from citizens’ records so that they can more successfully move on with their lives.

This “let’s make it right” social justice motivation gives the MORE Act a far-greater chance of becoming law.

***Regardless of the motivations behind the bill, its passing would be huge for marijuana investors

That’s because, despite legalization legislation passing in various states, marijuana’s illegal status on the federal level has kept broad industry growth in check. After all, what good is a state legalization if the federal government will still prosecute you?

But if the threat of federal prosecution is lifted, marijuana businesses would be free to establish traditional banking relationships, market their products, and develop a real, thriving industry.

Last week is evidence that we’re closer than ever to this reality.

The vote is also evidence of the federal government finally moving closer to reflect the beliefs of the majority of the voting public. According to a 2018 Quinnipiac University poll, 70% of U.S. voters support such a marijuana policy change.

Judiciary Committee Chairman Jerrold Nadler (D-N.Y.) spoke to this as he commented on the vote. He acknowledged that more than two out of three Americans believe that cannabis should be legal, then he added:

States have led the way and continue to lead the way, but our federal laws have not kept pace with the obvious need for change. We need to catch up because of public support [in favor of legalizing marijuana] and because it is the right thing to do.

***Remember where we are in terms of marijuana’s overall growth

The marijuana sector’s brutal summer and fall was caused, in large part, by “me too” investors. In other words, speculators who saw huge gains coming from marijuana stocks and threw money at any stock that even hinted of marijuana … regardless of whether the underlying company was worth investment.

Given this, keep in mind that even if the MORE Act passes, it doesn’t mean any random marijuana stock will be worth your money. As we wrote in last Monday’s Digest, we’ve now moved beyond the initial hype phase of the marijuana sector. From here, sound fundamentals — in other words, the ability to generate profits — is what will drive the 2.0 growth of the sector.

But given that marijuana itself is a commodity, what will be one of the most important distinguishing factors between Marijuana Company A and Marijuana Company B?

A brand.

Matt spelled out how this works:

… the biggest and potentially life-changing profits will come from brands. Producing a product that you can brand and distinguish as unique in the marketplace is a much, much better business.

Doing so allows you to build a loyal following, stand apart from the crowd, and raise your prices while maintaining your customer base …

If you’d like Matt’s help identifying specific marijuana companies that are developing world-class brands, click here.

***So, where does the vote go from here?

 

Back to Matt for the answer:

The next step for the bill is to pass through other House committees and then move on to a full vote on the House floor, where Democrats are in the majority and are likely to vote in the affirmative — particularly during presidential election season.

Its fate in the Senate is cloudier, but it’s too early to count out the possibility of full legalization.

And what about marijuana stocks? What’s the outlook there?

Back to Matt:

The next two weeks will be critical for cannabis stocks. We have only 3.5 trading days this week surrounding the Thanksgiving holiday. (The market is closed on Thursday and open only until 1 p.m. ET on Friday.) Volume will be light, which typically lends itself to higher volatility.

I will be watching closely the next two weeks, especially to see if the sector can hold its lows from last Tuesday morning. If it cannot, another downdraft is likely. But if it can hold, look out. It could well be the start of a potentially massive year-end rally.

So, long-term picture, the writing is on the wall — marijuana’s legalization is coming at some point.

Short-term picture — the market action of marijuana stocks over the next two weeks will be important to watch for clues about whether the sector has turned the corner, or still has more froth to shake out.

We’ll keep you up to speed here in the Digest.

Have a good evening,

Jeff Remsburg