Cannabis stocks are astonishingly weak following the nomination of Rep. Mike Johnson (R-LA) as House speaker. He has always opposed cannabis legislation. So, the fear is that Secure and Fair Enforcement Regulation (SAFER) Banking Act reform (allowing banks to serve cannabis companies) cannot get out of the House. This is probably true. However, Senate leaders could put the reform in must-pass legislation, and the House may well accept it, given how many current House members have approved the bill in the past.
The real reason why cannabis stock weakness makes no sense is that it completely ignores progress on rescheduling under the Controlled Substances Act (to Schedule III from Schedule I). This is the big potential catalyst on the horizon. Cannabis experts expect progress by year end. They expect Drug Enforcement Agency (DEA) publication of a proposed rule following the Department of Health and Human Services (HHS) recommendation to reschedule. I still believe this could happen sooner. Another potential catalyst (much smaller) would be Ohio approval of a recreational use legalization referendum in early November.
Despite the potential rescheduling catalyst on the horizon, cannabis stocks have made a complete roundtrip to return to where they traded before news of the HHS recommendation came out. Cannabis stocks are a strong buy in the weakness. Consider any of the names in our portfolio, the AdvisorShares Pure U.S. Cannabis (MSOS) exchange traded fund (ETF), or the leveraged version, AdvisorShares MSOS 2x Daily (MSOX).
Here is an interesting new twist for cannabis stocks, announced late last week. The law firm Boies Schiller Flexner has filed a suit against U.S. Attorney General Merrick Garland, arguing against a form of federal government jurisdiction over cannabis companies.
Their reasoning is that under the constitution, the federal government can regulate interstate commerce, but it cannot regulate intrastate commerce. Since cannabis companies track the provenance of product from seed to sale, they can now prove that all their product is grown and sold inside the state where they operate. This would imply a prohibition on the tax implications of Schedule I status, in which the Internal Revenue Service blocks deduction of operating expenses, leading to much higher tax rates.
A similar suit in the past failed because, at the time, a court deemed cannabis provenance to be untraceable, and so intrastate commerce status could not be proven. Now provenance can be proven, says the lawsuit, which makes the prohibition against federal intrastate commerce regulation kick in.
I am adding to MSOS and MSOX in the weakness, and I will continue to add, particularly if they get weaker from here. I am adding in part because visible progress on rescheduling is likely, and the Boies lawsuit may hold promise. Cannabis companies may well get a huge cash infusion in the form of tax refunds, or at least in the form of greater retained cash going forward, if Boies is successful. This will take at least a year or two to play out. But substantial progress along the way could serve as a catalyst.
