Back on October 7 intraday, I recommended selling our entire position in Tilray Brands (TLRY) at 3.47; our entire position in ETFMG Alternative Harvest ETF (MJ) at 5.48; $7,000 of Curaleaf (CURLF) at 6.33; and $7,000 of Green Thumb (GTBIF) at 13.35.
My logic at the time was that the cannabis group rally was unjustified. President Biden had announced that he is asking agencies to reconsider the Schedule 1 status of cannabis. But the process can be quite lengthy. It may take one to three years. So, the near-term rally seemed likely to fade.
This turned out to be correct.
All the positions have now round tripped, or nearly so. Thus, I am buying back the positions I sold on October 7, and introducing a new exchange traded fund (ETF) into our portfolio.
Specifically, I’m putting $7,000 of our cash into TLRY at 3.38, $7,000 into the MJ at 4.68, $8,000 into the ETF AdvisorShares Pure US Cannabis (MSOS) at 10.02, $7,000 into CURLF at 5.38, and $7,000 into GTBIF at 10.35.
But if decriminalizing (or down-scheduling) cannabis at the federal level is still a one- to three-year affair, why move back into these names so quickly?
To understand this, it’s key to know that when you invest in cannabis, you are taking on politicians as your investing partners because they play such a big role in the future of the sector. There are pros and cons in this.
*The positive is that politicians can spring bullish surprises on us at any moment, creating quick 20%-30% gains in a matter of an hour or two, as we saw with Biden’s announcement last week. No other investment group at the moment offers this kind of opportunity.
*The negative is that politicians are largely unpredictable, and often even seemingly irrational. So, it is nearly impossible to predict the timing of these 20%-30% moves. The best one can do is get exposure. Wait for the move. Trim some if the move seems warranted. Then buy back – as we just did.
Another Big Move By Year End?
While politicians are unpredictable, the next big move up may well happen much sooner than the multiyear time frame for decriminalizing. Here’s why.
Biden’s pronouncement last week is a bullish gesture for the group. It could speed up progress on the Secure and Fair Enforcement Act (SAFE) Banking Act which would allow financial institutions to take on cannabis companies as customers. Or the “SAFE Plus” version of it that includes other marijuana reform measures.
Sen. Cory Booker, a Democrat from New Jersey, in the past few days stated that he sees a chance the SAFE Banking Act could be passed during the lame duck session after the elections. Normally, not much gets done during lame duck sessions. But this may be an exception.
“We believe the President’s actions will facilitate the negotiations between Senate Democrats and Republicans to pass SAFE Plus in the lame duck,” says Pablo Zuanic, who covers the cannabis sector at Cantor Fitzgerald. “We also think this may reduce the pressure on Democrats to add several ‘restorative justice’ features to SAFE Plus that could take away Republican support to pass the bill with 60 votes needed.”
The SAFE banking act would probably be enough to clear cannabis companies to list on the Toronto Stock Exchange, says Jefferies cannabis sector analyst Owen Bennett, especially if it included capital market protections. “We think the Biden update now makes this even more likely,” says Bennett. “This, for us, could still bring in meaningfully more institutional capital.” The reasons: It would provide much greater liquidity in these names, and it would help more investment shop compliance departments get comfortable with exposure to cannabis.
To sum up: Another lightning strike may hit the group and create a big upwards move between now and the end of the year, in the form of progress on the SAFE Banking Act. No guarantees, of course. But even meaningful progress on this, without actual passage, would put another bid under cannabis names.
Taking a step back from cannabis sector trends, big picture I still believe we will see signs of progress on inflation soon. This could ease worries about the Fed creating a recession, which in turn would bring a return to the “risk-on” investor mentality, which particularly favors speculative groups like cannabis.
By many investor sentiment measures I track, sentiment is at extreme lows. Though negative sentiment is not a pinpoint market timing indicator, it is a signal that cannabis stocks (and stocks overall) are a buy, in the contrarian sense.