The marijuana sector is surging … how the Blue Wave may turn into a Green Wave … increasing odds of meaningful reform … how to play it

Our timing wasn’t perfect, but Digest readers who acted on our May 26th issue would be sitting on 72% gains right now.

And that’s despite having to sit through a pullback of nearly 25%.

What are we talking about?

From our May 26th Digest:

Don’t look now, but a sector you might have left for dead has been outgunning the S&P since markets bottomed in March.

Any guesses?

Here’s a clue …

Out here where I live (California), both the state government and surfers have classified this sector as “essential” during the coronavirus lockdown.

You guessed it … marijuana.

Below is the chart of the Alternate Harvest ETF (MJ), since May 26th.

Since this ETF contains dozens of stocks that are engaged in the legal cultivation, production, marketing or distribution of cannabis products, it’s a loose proxy for how the broader marijuana industry is performing.

Below, you’ll see where we suggested the bottom in the marijuana sector was in, resulting in an attractive risk/reward set-up.

 

 

Although there was one more drawdown of roughly 25% after our call, Digest readers who acted in late May would still be sitting on roughly 72% gains today.

***But the real story here is what’s happened to the sector since November — MJ is up 120%

It’s not exactly a mystery why.

But for those details, let’s turn to Matt McCall, our marijuana investment expert and the editor of Investment Opportunities.

From his update in early January:

I’m sure you’ve heard the Democrats taking the White House and controlling both houses of Congress called the “Blue Wave.” If you know me at all you know I’m not going to talk about politics … except for how it can make us money.

And in that sense, the Blue Wave could be called the “Green Wave” for us cannabis investors.

The broad rally in cannabis stocks included not only U.S. stocks, which remain in the hot spot with decriminalization and legalization now more likely than ever, but Canadian companies as well. Stocks in both countries broke out to multi-month highs.

To Matt’s point, although MJ is up 120% since November 2nd, individual marijuana stocks are up much higher.

There’s Cronos Group, up 136% … Aurora Cannabis, tacking on 235% … and Aphria, soaring 273% …

 

***These gains are welcomed by marijuana investors, but for sustained, long-term growth, there has to be meaningful legislative reform

So, where are we with that?

In early December, the House passed the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, which would remove marijuana from the Controlled Substances Act.

It would also authorize a 5% tax on marijuana sales that would fund community and small business grant programs.

While this passing was a major domino to fall as our nation continues down the path toward marijuana legalization, Matt noted that the bill making it through the Senate was all-but-impossible:

As big as this is for the industry, it is just the next step forward — albeit a big one. Keep in mind a couple of things.

First, the bill now goes to the Senate, which is led by Mitch McConnell, and is likely to be voted down immediately.

Second, decriminalization is not quite the same as legalization at the federal level. I remain convinced that legalization will be the ultimate outcome, but it will take more time.

But with Democrats Raphael Warnock and Jon Ossoff narrowly winning their Senate races in Georgia, Democrats now have the numbers to win a tight Senate vote (if Vice President Harris is needed to break a partisan 50/50 tie). Given this, the odds the Senate could pass the MORE Act here in 2021 has increased dramatically.

 

***The Blue Wave also brings new hope that the Secure and Fair Enforcement (SAFE) Banking Act will go forward

To make sure we’re all on the same page, the purpose of the SAFE Act is to shield banks that take on marijuana business clients from being penalized by federal regulators.

You see, the majority of marijuana companies have been forced to operate on a largely cash-only basis because banks won’t work with them. Banks fear reprisal from regulators for taking on marijuana companies as clients because marijuana is still illegal on a federal basis.

In September 2019, the House passed the SAFE Act. However, in making its way to the Senate, it was blocked by Banking, Housing, and Urban Affairs Committee Chairman Mike Crapo (R-Idaho).

But Crapo just lost his chairmanship when Democrats took control of the Senate to Sherrod Brown. This clears a pathway forward in the Senate.

From Politico:

… (Brown) said in several interviews during the 116th Congress that the banking bill was something Democrats wanted to work on with Republicans. He added, however, that Democrats’ ambitions are not limited to banking access.

“We’re not just going to help the banks and then not at all deal with the damage that has been caused by arrests and law enforcement,” Brown said in late 2019.

So, here too, the odds of meaningful reform legislation have increased.

Back to Matt, from his latest issue of Investment Opportunities:

With a Blue Wave now taking over Washington, D.C., we’re likely to see the passing of the SAFE (Secure and Fair Enforcement) Act that will open up banking for the cannabis industry.

And that’s a bigger deal than most people realize.

U.S.-based marijuana companies would have the ability to bank like regular businesses, and there could also be a simpler path to uplist to a major stock exchange like the NYSE or Nasdaq.

That’s a huge deal and will allow for big institutional money to flow into the sector.

 

***Last Thursday, we learned Senate Majority Leader Chuck Schumer is looking to merge marijuana reform bills in a step toward reform

From Marijuana Moment:

Senate Majority Leader Chuck Schumer (D-NY) says lawmakers are in the process of merging various marijuana bills, including his own legalization legislation, as the chamber works to enact reform this session …

Notably, he said “our bill — the bill that I put in — now we’re putting it together with some other bills.”

The legislation that the now-majority leader filed last Congress and the one before that, the Marijuana Freedom and Opportunity Act, would federally deschedule marijuana, reinvest tax revenue into communities most impacted by the drug war and fund efforts to expunge prior cannabis records.

It’s not clear which other bills are being merged, but it stands to reason that the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act would be incorporated, given that advocates have strongly pushed for that proposal to be the vehicle for reform.

Yesterday, Schumer said he would make reform legislation a key priority in Congress. The sector popped on the news.

 

***How to play this marijuana resurgence

If you’re looking for broad exposure to the industry, there’s the ETF, MJ, which we referenced at the top of this Digest.

However, if you’re considering the fund route, I’d recommend you look at the Cambria Cannabis ETF, with the ticker, TOKE.

Regular Digest readers will recognize the name of Cambria’s co-founder, Meb Faber. He’s a quant investor whose market research we’ve featured many times here in the Digest.

Since the sector-lows last March, TOKE is up 172% compared to 169% for MJ.

While these returns are similar, there’s a huge difference — TOKE comes with a net expense ratio of just 0.42%. MJ’s expense ratio is approaching double that, at 0.75%. Over the longer-term, this fee-differential can make a massive difference in your overall return.

But if you’re looking for a more explosive way to play this sector, we’d point you toward Matt McCall.

In his newsletter, Investment Opportunities, Matt holds a basket of nearly 20 top-tier marijuana plays. It’s a unique mix of different slants on the marijuana sector — suppliers, retailers, real estate, and technology, as just a few examples.

I’m looking at his open portfolio as I write. Since November, I’m seeing picks that have climbed 123%, 137%, 168%, 206%, and 281%.

To be clear, this portfolio is still recovering from the sector crash of 2019, but this is a strong resurgence and we expect much higher prices in the months to come.

Wrapping up, regardless of which approach is right for you, the marijuana sector is booming. And if the Blue Wave continues morphing into the Green Wave, this is just the beginning.

Here’s Matt with the final word:

The bottom line is that now is not the time to sell and run.

Stay patient like you have been and use all pullbacks to establish your stake as the next phase of the cannabis boom we’ve been waiting for is just beginning.

Have a good evening,

Jeff Remsburg