Cannabis stocks have fallen sharply since the beginning of April. The AdvisorShares Pure U.S. Cannabis (MSOS) is down 15.4% since April 1. There are two reasons for the recent pullback.
First, investor enthusiasm for stocks overall has waned, creating significant declines across indices. Because cannabis is perceived as a riskier sector, cannabis stocks decline more than most stocks when investors move into risk-off mode.
Second, many analysts and investors had hoped for visible progress on key catalysts by now – chiefly rescheduling and cannabis banking reform. They have been disappointed.
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On the first reason, seasoned technical analysts like Ralph Acampora and Larry Williams tell me they think the stock market has more downside from here through the middle of May. So, cannabis stocks might not get much help on the market sentiment front.
On the second point, though, those two catalysts are not off the table, however. This suggests cannabis stocks are a buy in the current bout of sector weakness.
Here’s a little background on these two potential 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). We are now waiting for a proposed rule from the DEA, which will be a major catalyst for the group. This could land soon.
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 still see progress soon 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 current pullback. For more detail on other bullish trends and the best names to own, consider subscribing to Cabot Cannabis Investor.
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