3 Cannabis Investing Experts Explain US Legalization Hype

MORE Act clears House for a second time

Last week's vote allowed the MORE Act to clear the House for a second time, and sent cannabis stocks on a volatile week-long race of gains that was capped by a few sharp declines.

However, while market watchers believe the vote is a significant symbol of shifting perspectives on cannabis, it likely won't bring immediate changes in federal cannabis policies.

Expectations across the board have indicated that the MORE Act has little to no chance of clearing the Senate given the gridlock seen in the upper chamber of Congress.

“We believe that the MORE Act is dead on arrival when it gets to the Senate,” Nawan Butt, portfolio manager with Purpose Investments, told INN in an interview.

Legislation surrounding cannabis at the federal level in the US has been on a path of incremental change that reflects the challenging realities of politics in the nation.

In a video discussing the recent cannabis vote, analyst Alan Brochstein expressed his wariness about the excitement seen in the space due to chatter around legalization efforts in the US.

“I’m definitely on the record saying the MORE Act passing the House of Representatives isn’t in itself a big deal — it’s already done that once,” Brochstein said. "Still, it could have some legs. We’ll see."

Cannabis rally highlights investor misunderstandings

Several financial experts that INN spoke to shared similar sentiments, saying they were disappointed to see the cannabis investment market continue to operate based on speculation and hype.

Butt, who co-manages the Purpose Marijuana Opportunities Fund (NEO:MJJ), thinks the market is still largely dictated by the "groupthink" sentiment of retail investors who follow the space.

“The reaction of the stocks tells us that the market is still very naive, and a little immature, when it comes to completely understanding the implications of incremental legislation, the chances of incremental legislation passing and what it means for which player,” he explained in conversation with INN.

"What it means for which player" is a key question, especially when it comes to Canadian producers and how future US legislation changes could affect them. Many of these stocks have reacted meaningfully to the MORE Act vote despite the cloudiness of what will come next.

“To us, the Canadian companies' response is an overreaction,” Charles Taerk, CEO of Faircourt Asset Management, told INN. Taerk, who manages the Ninepoint Alternative Health Fund, said Canadians trade better on US legislation news not because of their future potential in the international market, but due to current market conditions.

The financial executive said that some Canadian companies have had a greater reaction to the news thanks to their senior US listings, which provide better trading availability, more liquidity and a higher trading volume. However, realistically speaking, future legislation will only affect US operators.

“As a result, when there's positive news, and when there's negative news, that effect is amplified,” Taerk said.

Butt also believes Canadians are overexposed to the US news, saying, “The crux is that those are the names which have the most eyes on them, both retail and institutional, but most of this rally has been led by retail."

Of course, this type of move can create opportunities — Matt Carr, chief trends strategist at the Oxford Club, told INN he sees the past trading week as a standard “buy the rumor, sell the news” event.

“When you have something with a vote coming up, that is positive for investors, you can do some short-term positions, you can do some short-term trading,” he said.

The investment expert pointed out that thanks to their US listings, Canadian companies are available on investment apps like Robinhood; this has helped drive recent volatility for these stocks.

Market conditions affecting perceptions of US growth story

Looking beyond the reaction of Canadian cannabis companies to last week's news, Taerk pointed out that the lack of comprehensive federal legislation in the US has restricted financial institutions and other players from participating in what he called the "ignored growth story" of state-by-state cannabis programs.

He believes growth in the US cannabis market is currently being led by multi-state operators that trade on Canadian exchanges and OTC exchanges.

According to Taerk, there is no roadmap for Canadian operators to reach the level of exposure to the thriving US cannabis marketplace that their counterparts below the border already have.

“The Canadians do not have direct access into the US market. They would be behind even if the MORE Act were passed,” Taerk said. “The US names have more capital, are more profitable and have existing state licenses.”

Investor takeaway

The future of cannabis policy in the US remains difficult to predict. Experts in the space are excited about what’s ahead, but getting there will take time and the path is uncertain.

In the meantime, the capital markets continue to be dictated by excitement generated by current events. This volatility can generate returns for savvy investors, but has also created a space that is tricky to navigate.