Empty Words. Empty Promises. Exert Patience.
Why the recent hopium in cannabis signaled a spectacular rise and fall
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Cannabis has been quite the whirlwind over the last few years. Many investors know the pain of holding onto the hopes of a change in governmental policy that would immediately change the cannabis market.
These changes specifically revolve around SAFE banking and the effect of what 280E would have on each of U.S. cannabis’ financial statements. I wrote about this late last year in the post below.
YTD, U.S. cannabis is getting crushed and anyone that’s held onto these names listed below has truly felt pain. Considering the underlying fundamentals of these companies are actually solid for the most part, it has been quite frustrating to see the price action deteriorate.
Not even cannabis ancillary players have been spared and in most instances which are arguably better since they have uplistings and access to bigger pools of liquidity. Many of them have actually deteriorated worse than the pure-play multi-state operators.
What is most interesting to note is what’s actually happened in the last 3 months. When all hope was lost, a forgotton friend came out of nowhere and made a special announcement. President Biden made an announcement on October 6th saying that he would pardon all prior federal offenses of marijuana possession, urged governors to do the same, and then asked the attorney general to look into how the drug is scheduled.
Stocks rallied on the news to the tune of an average of ~41% that day. It seemed that the long waiting for policy reform was finally coming.
🎉 BIG WIN. 🎉
I tweeted about my thoughts on this since I’ve been around this block a few times myself.
While there obviously was a chance that I could have been wrong, I was confident that this was nothing more than headline moves with nothing really substantial behind it.
To prove this, NBC news even reported just how little substance in the grand scheme of things his announcement was when it came to pardons.
A senior administration official said that over 6,500 U.S. citizens were convicted of simple possession of marijuana under federal law from 1992 to 2021 and that thousands more were convicted under a Washington, D.C., code. No one is in federal prison solely for simple possession of marijuana, and most marijuana possession convictions occur at the state level, the official said.
This basically means that the federal pardon, while helping some, was quite minuscule considering most offenses were at the state level.
To put things in perspective, out of 350,149 cannabis arrests in 2019, about 91 percent were for possession.
Despite the news, this was the first catalyst that set off what would be a spectacular rally in cannabis stocks. The next were inclusions of cannabis reform in certain bills that would also benefit the entire industry. This was essentially one of the switches that would help ignite the cannabis bull market which I spoke about on the megabrands podcast over the summer.
However this would not be the case, and what was a spectacular rise in names up until that point had a dramatic fall.
This fall from grace has almost essentially wiped out most, if not all gains since the pre-White House announcement over two months ago.
Cedar Grove Capital Management decided to sit out this entire time because of just how loosely these moves were being held together on the mere speculation of reform.
When policy drives the narrative, prices can fluctuate on a dime, as you saw above.
Don’t get me wrong though, I am still bullish on the overall cannabis industry and still think it’s THE most undervalued sector of the entire market but there are little to no more catalysts to push it higher for the time being.
There’s still speculation out there that something will get passed in the lame-duck session but call me skeptical. For now, there doesn’t seem to be a solid reason to hold a long position in any names until more substance arises.
The time will come and we’ll see what the 2023 year has in store for cannabis. Hopefully, it’s a good year.
For those of you that have made it this far, take the poll below to see what your fellow cannabis investors think.
Until next time,
Paul Cerro | Cedar Grove Capital Management
Personal Twitter: @paulcerro
Fund Twitter: @cedargrovecm