Marijuana Boom/Bust 2.0

More reform legislation passes, and even more is coming … another boom/bust in the sector … where we are in marijuana’s long-term sector evolution

The U.S. continues barreling toward federal marijuana decriminalization.

From Senate Majority Leader, Chuck Schumer:

Voters in four more states this election voted to legalize adult recreational use of marijuana, and that proves once again it’s past time to work to undo the harm done by misplaced priorities, particularly in black and brown communities.

It’s time to decriminalize marijuana nationally.

The comment comes from a fundraising email Schumer sent to supporters last Friday, in which he highlighted “Democrats’ bold agenda for change this year.”

It builds on recent momentum for marijuana-reform. For example, last month, Schumer pledged that he, along with Senate Finance Committee Chairman, Ron Wyden, and Senator Cory Booker, would release a draft bill that ends federal marijuana prohibition. He specified it would be accomplished “in the early part of this year.”

It’s unclear what the draft proposal will include, but Schumer said they’re in the process of merging various pieces of existing legislation.

***The difference between decriminalization and legalization shines a spotlight on state policy

Note how, above, Schumer pledged to decriminalize marijuana, not legalize it.

Let’s clarify …

From RDH Mag:

Often, the terms “legalized” and “decriminalized” are used in the wrong context.

Legalization refers to the ability to purchase cannabis products as long as the customer meets age requirements, as with purchasing tobacco or alcohol.

Decriminalization refers to maintaining marijuana’s status as an illegal substance in certain cases, but not prosecuting for possession under a certain amount.

If the federal government actually legalizes marijuana, it would, in essence, be an endorsement of the substance, paving the way for regulation and taxation on a federal level.

Decriminalization doesn’t accomplish this. Instead, it has more of a social relevance.

To illustrate, take the MORE Act (Marijuana Opportunity Reinvestment and Expungement) …

It sought to de-schedule cannabis from the Controlled Substances Act, while enacting various criminal and social justice reforms related to cannabis, such as expungement of prior marijuana convictions. It would not have actually legalized the substance for adult recreational use.

Today, we’re seeing more politicians speak toward “decriminalization” rather than legalization. With a substantial percentage of the nation not yet in favor of full legalization, this is the safer political move.

(Yet, I’ll note that a recent Emerson poll found that 61% of survey respondents said they thought recreational cannabis legalization is a good idea.)

So, decriminalization — not legalization — is currently the target for Schumer and many leading Democrats. However, even federal decriminalization legislation would be a major milestone, because it would pave the way for more states to enact their own full-legalization reform.

We’re already seeing this happen … and it’s picking up speed.

***Four more states legalized marijuana this past December

As Schumer noted above, recreational marijuana got the greenlight from lawmakers this past December in four new states: Arizona, Montana, New Jersey and South Dakota.

And it appears that this past Saturday, another state made the move …

Virginia lawmakers approved a bill that will legalize recreational marijuana in 2024. If signed by Gov. Northam (who has been vocal about his support of marijuana legislation), Virginia will become the 16th state, along with the District of Columbia, to legalize recreational use.

Meanwhile, five additional states are now considering legalization — Connecticut, Maryland, New Mexico, New York, and North Dakota.

One of the biggest drivers of this policy shift is the revenue that states would receive from marijuana taxes.

From Barron’s:

New York is another big-population state looking at legalizing sales, in part to reap taxes to help cover a budget shortfall.

Cowen [a research firm] said despite two previous failed attempts to legalize adult-use sales, “legislative changes around social equity, coupled with Covid-19 budget deficits and legalization in New Jersey will likely get the bill across the finish line.”

Our marijuana investment specialist and analyst behind Investment Opportunities, Matt McCall, noted this dynamic back in 2018:

Each year, more states join the movement, and each time that occurs it puts pressure on a neighboring state to consider legalization. (Think about the potential tax dollars that would go across state lines.)”

You can be sure that cash-strapped states, with budgets destroyed by the pandemic, will be eyeing any additional source of tax-income.

This is highly-bullish for reform legislation measures — and by extension, top-tier marijuana companies.

However, don’t confuse any ‘ole surging marijuana stock with a “top-tier” marijuana stock …

***2019 all over again?

In early 2019, you could make money in nearly any marijuana stock. It seemed that double- and triple-digit gains were piling up everywhere … until they weren’t.

As just about all fledgling investing sectors do, marijuana suffered a painful washout.

Below is the chart of the Alternate Harvest ETF (MJ). 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, we look at MJ from the beginning of 2016 through mid-March of last year. From its 2018 highs to its March-low, MJ lost over 75% of value.

This crash was nothing new. It was simply a part of a process in which a sector evolves, transitioning from hype to fundamentals.

It’s a familiar sequence …

A breakthrough technology or legislation opens the door to a new, exciting investment sector … enamored investors stampede into the space, pushing prices to stratospheric levels … at this stage, fundamentals don’t matter, it’s all about excitement … eventually, all the emotion-based investors have bought in, leaving just fundamental-based investors who see a huge disconnect between sector prices versus earnings … this leads to a volatile wash-out … prices crash and headlines proclaim the bubble has burst and the sector is done.

Of course, the sector isn’t done.

Rather, it’s at this point that the real, long-term sector growth begins — but this time, it’s based on fundamentals, not excitement.

Here’s a visual illustration from Gartner …

And here’s how Matt put it all the way back in 2019:

When you study the history of massive, world-altering business trends and the long-term wealth-building opportunities they create, you’ll learn that any time a major new industry is in its early stages, temporary bouts of extreme enthusiasm followed by sharp corrections (aka “high volatility”) are the norm — not the exception.

***But even though marijuana is past its major “bust” point, that doesn’t mean we can’t see temporary bouts of 2019-style booms and busts

In fact, we just experienced one … and it might not be over.

Below, we look at the same MJ chart as before, but continue it through the present.

Note its meteoric rise since this past fall. But also look at the knife-edge drop in recent weeks, down nearly 35% as I write (circled in red).

We can see the euphoria-fueled irrationality in a single stock by looking at marijuana leader, Aphria.

The stock ended 2020 trading for less than $7 per share. But just weeks later, in early February, it had surged to $26.30.

Much of this came from the Reddit investors, which is the same group behind the short-squeeze that sent GameStop’s stock stratospheric earlier this year.

These investors helped drive Aphria up 280% between the beginning of the year and mid-February. Keep in mind, this happened while Aphria saw its net loss widen to $120.6 million for its most recent quarterly earnings performance.

Now, Aphria is still a strong company with a bright future. To illustrate, though its loss widened in January, its sales increased for a seventh-straight quarter, topping $160.5 million.

This is, in part, why Matt likes Aphria, and includes it in his Marijuana Boom portfolio. However, there’s a huge distinction we need to make …

Matt’s “buy-up-to” price for Aphria is just $7.50. This reflects his emphasis on fundamentals, not hype.

Aphria’s recent price-surge didn’t reflect its fundamentals … which is why it didn’t last.

Below, you can see how the stock is down 21% since mid-February, and likely has further to fall.

Don’t forget — even a great stock can be a horrible investment when its price-tag is too high.

Wrapping up, let’s return to the sector-evolution chart from above …

Using this chart’s terminology, we’re in the early climb of the Slope of Enlightenment.

As just one illustration of this, news from yesterday is that legal sales of marijuana in 2020 hit a record of $17.5 billion. That’s a whopping 46% increase from 2019.

The industry is maturing and growing. But this doesn’t mean there won’t be periods when prices become detached from fundamentals, like we’ve experienced recently.

Don’t be seduced by quick riches when this happens.

Ignore the hype — maintain a focus on those select companies driven by genuine fundamental strength.

There’s big, long-term money to be made in the marijuana sector, but we have to be more careful about it today. Federal reform legislation is coming, but that doesn’t mean that it’s 2019 all over again when fundamentals didn’t matter.

They do — more than ever. Make sure your marijuana-sector stocks reflect that.

Have a good evening,

Jeff Remsburg

The post Marijuana Boom/Bust 2.0 appeared first on InvestorPlace.

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