The Sector Back From the Grave

While the S&P has been soaring, there’s one sector (other than tech) that’s crushing it … and you probably haven’t been paying it any attention

Don’t look now, but a sector you might have left for dead has been outgunning the S&P since markets bottomed in March.

Any guesses?

Here’s a clue …

Out here where I live (California), both the state government and surfers have classified this sector as “essential” during the coronavirus lockdown.

You guessed it … marijuana.

Below is the 1-year chart of the popular marijuana ETF, “MJ.” It’s the Alternate Harvest ETF. 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.

You can see it charging 50% higher since its late-March low (which coincided with the S&P’s low), while the S&P is up just 35% over the same period (as of Tuesday morning when I’m writing).

Certain marijuana-sector leaders have done even better over the same time.

For example, Aphria is up 61%, Harvest Health & Recreation is up 79%, and Charlotte’s Web is up 95%.

***If we pull back and look at MJ over the past 52 weeks, we see a clear bottoming-out in its chart

There’s a pronounced succession of higher highs and higher lows. From a technical perspective, this is what marijuana investors have been waiting to see.

Now, this doesn’t mean the sector couldn’t turn lower again, especially if the broad market sells off on any negative coronavirus-related news.

But if the worst of the coronavirus is truly behind us, then this looks like the makings of a real bottom in marijuana.

And frankly, it has the feel of one. By that, I mean it’s happened with no fanfare, practically zero attention by the financial press, and with virtually no one bragging about the big money they’re making.

In fact, most marijuana investors are down so much that I’d guess many aren’t even looking at this corner of the market today.

But in the shadows of the Amazons and Zooms of the world, marijuana has quietly been staging a sustained comeback …

This is exactly the kind of environment from which bull markets begin.

***Is the marijuana sector getting a helpful push from Washington DC?

Two weeks ago, House Democrats passed the Heroes Act, a $3 trillion package that would send money to state and local governments.

Now, in its current form, it won’t make it through the Senate given the usual partisan bickering. That said, the House version contained something very interesting — HR 1595.

And what is that, you ask?

It’s the SAFE Banking Act.

To make sure we’re all on the same page, marijuana’s illegal status under federal law means getting banks to accept deposits from marijuana-related companies is extremely difficult. That’s because any bank that does business with marijuana companies could be charged with “aiding and abetting” — which is a federal crime. The result is that many marijuana companies are all-cash operations.

As you can imagine, “all cash” presents safety challenges to marijuana companies (especially in our current “social distancing” world).

But beyond that, given our increasingly cashless society, as well as the consumer’s expectation for a convenient buying experience, in order for the marijuana industry to make its next quantum leap, banks need to be in on the game.

It was last July when we noted here in the Digest that Sen. Mike Crapo (R-ID), Chairman of the Committee on Banking, Housing and Urban Affairs had been a roadblock to meaningful banking reform. He summed up his stance by saying “as long as cannabis is illegal under federal law, it seems to me to be difficult for us to resolve” the financial services issue.

But pressure continues to build — the House’s passing of the HEROES Act which included HR 1595 is one example.

And last week, we saw another example in the form of 34 attorneys general …

***It’s time to correct “an untenable situation”

Before the Memorial Day holiday, we learned that a bipartisan coalition of 34 state and territory attorneys general are urging Congress to include language protecting banks servicing the marijuana sector in their next iteration of the HEROES Act.

From Marijuana Moment:

In a letter to House and Senate leadership on Tuesday, the top state law enforcement officials said there are three main reasons that providing the cannabis industry with banking access is especially necessary during the pandemic.

First, the public safety threat of operating on a largely cash-only basis has been exacerbated amid the crisis. Second, large cash transactions “places law enforcement, tax regulators, consumers, and patients at heightened risk of exposure to the virus.” Third, access to financial institutions would make it easier to collect tax revenue from marijuana sales, which is particularly needed to offset economic shortfalls due to the health crisis.

The officials went on to write that “the current predicament of a rapidly expanding national marketplace without access to the national banking systems has resulted in an untenable situation.”

***Let’s back up and revisit the third point from the attorneys general

Third, access to financial institutions would make it easier to collect tax revenue from marijuana sales, which is particularly needed to offset economic shortfalls due to the health crisis.

The coronavirus has destroyed state budgets.

Given this, politicians are scrambling for revenues from just about anywhere. And that means new interest in marijuana legalization, from which would stem new tax revenues.

From The New York Post:

COVID-19 might not be the only new strain to hit New York.

State lawmakers are making a fresh push to legalize pot and expand sports betting, saying tax income from the vices can help fill a gaping budget hole widened by the coronavirus.

Democratic state Sens. Jessica Ramos, Brad Hoylman and Jamaal Bailey — representing Queens, Manhattan and the Bronx & Mount Vernon respectively — teamed up with the Legal Aid Society on Thursday to urge state lawmakers to legalize recreational marijuana.

We’re seeing the same thing in Pennsylvania. From the Philadelphia Inquirer:

There’s a gaping budget hole caused by an economy in tatters …

… some Republican lawmakers in Pennsylvania are coming around — if slowly — to the idea of legalizing marijuana for adult recreational use …

For a state where tax receipts total more than $35 billion, the additional tax collections from marijuana alone would not solve the budget problem, but they could help the state’s fund-starved schools, or repair crumbling roads and bridges.

Meanwhile, looking around the nation, in New Jersey, there’s still a legalization ballot initiative for November. Arizona also has a recreational legalization initiative that’s likely to get on the ballot. In Mississippi, there are two different medical marijuana measures on the ballot for November. And in South Dakota, there are ballot initiatives for recreational and medical legalization.

***Given all this, we continue to believe it’s a matter of “when” not “if” marijuana will be fully legalized in the United states

It’s just a matter of when the nation will reach its tipping point.

Meanwhile, marijuana stocks appear to have found a bottom. The risk/reward setup at this point is looks very attractive.

If you’re not sure where to start looking in this sector, Matt McCall has a marijuana portfolio in his Investment Opportunities newsletter, which is where Matt tracks the most significant trends impacting the investment markets — think 5G, artificial intelligence, and robotics).

We’ll continue to monitor the sector and keep you updated here in the Digest.

Have a good evening,

Jeff Remsburg