Insider reports claim we’ll see a vote on federal marijuana legalization — this week
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.
The legislation, which is sponsored by House Judiciary Committee Chairman Jerrold Nadler (D-NY), would remove marijuana as one of the items identified by the Controlled Substances Act (CSA), in effect, legalizing it. It would also block federal agencies from denying public benefits or security clearances over marijuana use.
Now, the vote on this legislation hasn’t yet been officially listed. But it’s expected to be announced sometime today — potentially by the time you read this. Of course, it’s all a bit cloak-and-dagger at the moment, so we’ll have to wait and see how this unfolds.
It’s unclear how the Senate would react if the House passed such a bill. But there is certain to be some Republican opposition, just as there was with the SAFE Banking Act.
In any case, this is great news for marijuana investors who have been sitting through a brutal sector pullback for months.
***Understanding the investment cycle of a new industry
While the anti-marijuana crowd is crowing about the sector’s major pullback being evidence of an investment fad gone belly-up, more seasoned investors interpret it differently.
What we’re experiencing now is a fundamental shift in the nature of the cannabis investment market similar to what we’ve seen in history with other fledgling markets. It follows a time-worn pattern …
A cutting-edge technology or the passing of groundbreaking legislation suddenly opens up a new investment market.
Investors are wowed by amazing growth projections.
Stocks related to the sector begin enjoying huge growth as investors clamor to take part. Any company even peripherally-related to the sector benefits — regardless of the company’s specific fundamentals.
Glowing headlines, life-changing stock gains, and fear-of-missing-out acts as a magnet, sucking in investment dollars from Main Street investors who aren’t really sure what’s going on, they simply want to make money.
The basics of smart investing are ignored. Profits? Who needs ’em? Cash flow? Whatever. Gains are purely momentum-driven (the “greater fool” theory).
Stock prices reach stratospheric “priced for perfection” levels … but that’s when these companies begin to report “less than perfect” news. And what happens?
The bubble bursts as investors wake up, realizing they’ve sunk money into some companies that aren’t fundamentally sound.
Selling leads to more selling, which leads to faster losses, which leads to panicked selling. Companies with wonderful prospects are abandoned just as quickly as companies with woeful prospects. Fear, not logic, rules the day.
Whereas investors were willing to overlook bad news in the sector’s euphoric rise, investors now won’t consider positive news in its apocalyptic fall. Whether or not the overall sector will even survive is called into question.
Finally, there’s a “capitulation” moment, when “me too” investors have suffered enough pain, so they sell.
The battered, left-for-dead industry now is now littered with the carcasses of the companies that didn’t measure up. But the well-run companies that have survived are poised to begin “growth 2.0” which is the saner, measured, long-term growth curve that’s rooted in fundamentals, not hype.
***Where are we today?
We’re still in the painful shake-out phase where scared investors are selling everything to avoid additional losses. As part of this, investors are unable (or unwilling) to focus on any positives. It’s a time of despair, fear, and anger.
Take Canopy Growth Corp. — the world’s largest cannabis company by market value.
Last week, its shares fell to a nearly-two-year low after the company missed revenue estimates while providing disappointing guidance. Shares fell as much as 18% on Thursday. They’re down another 4% as I write Monday morning.
Now, yes, the report was bad. No doubt about it.
Missed revenues, a bigger loss than expected, and underwhelming forecasts.
But there were a few glimmers of hope.
The company’s business-to-consumer sales in the Canadian adult-use recreational cannabis market climbed 24% quarter-over-quarter. Also, its capital expenditure needs are now mostly behind it after restructuring, and yet Canopy still has CA$2.7 billion in cash, cash equivalents, and marketable securities as of Sept. 30, 2019. Also, marijuana derivatives products should come to market by mid-December, which will inflate revenues for 2020.
I’m not writing all of this to suggest you should go buy Canopy right now. I’m merely making the point that all hope is not lost. There are some bright spots — which the market doesn’t want to see.
This same dynamic played out back in September when another marijuana company, Aurora Cannabis, fell 9.5% on earnings disappointments.
Matt McCall, editor of Investment Opportunities, is our resident marijuana expert. Here’s how he described what happened:
The sell-off tells me that investors reacted to analyst expectations and not reality … Keep in mind that Aurora’s revenues are growing faster than you’ll see with almost any other industry.
Specifically, in this latest quarter (fiscal Q4 2019), Aurora’s C$98.9 million was a 52% increase from fiscal Q3 2019 revenues of C$65.1 million. When you look at the year-ago quarter, that’s a 72% increase (from C$55.2 million). And when you look at the same quarter two years ago, that’s a 447% increase (from C$18.1 million).
And then you’ve got to look at future projections. In the chart below you see that the trend is still strong.
For 2020, we’re looking at potentially $521 million in annual revenues — more than double where we are now.
And by 2022, Aurora Cannabis is projected to be a $1.7 billion company by revenue. That’s just three years from now. (And that’s U.S. dollars, not Canadian.)
Despite the bright spots Matt identified, pessimistic sentiment ruled the day with Aurora, just as it ruled the day with Canopy. At the moment, the market is simply too jaded.
But rather than misinterpret that as evidence of a doomed investment sector, let’s see it for what it is — an indicator of where we are in marijuana’s overall investment cycle.
***What to look for now
I have no crystal ball, but if I had to guess, the capitulation-low for the marijuana sector is still in front of us, though we’re getting close.
But after it happens — meaning, when most Main Street investors with “weak hands” finally abandon marijuana — the dust will eventually settle, and that’s when the sector will be poised for sustained, long-term growth.
But the companies that do well at that point will feature something new. Sound fundamentals, thanks in large part to …
Here’s Matt on this:
…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 …
***The game-changer could be what happens with the congressional committee vote this week
Federal legalization would obviously remove the biggest hindrance to marijuana profits here in the U.S.
If that happens, then we’d expect to see a faster delineation between the marijuana “haves” and “have nots.” The marijuana companies with strong fundamentals and well-run operations will begin standing out, establishing name-brand recognition, and eventually, generating profits. The others will fade into the background.
We’ll be watching the outcome of this vote and will keep you informed here in the Digest.
Here’s Matt for the final word:
This is a rare buying opportunity in stocks in an explosive industry that has been beaten down while the massive long-term growth remains on track … We are once again at a critical moment for investors bold enough to act. Let’s take advantage.
Have a good evening,