By William Mikula, analyst, Palm Beach Daily
Next year is shaping up to be a watershed one for legal cannabis…
On Wednesday, a House committee approved the landmark Marijuana Opportunity Reinvestment and Expungement (MORE) Act.
The bill allows U.S. states to enact their own cannabis policies… and gives them incentives to clear criminal records of people with low-level marijuana offenses.
It’s by far the most sweeping legalization bill ever presented in Congress. And with bipartisan support, it has a strong chance to pass the entire House.
If it does, the bill will head to the Senate next year for a vote… And if the Senate approves it, it’ll go to President Trump for his signature into law.
This is bullish news for the cannabis industry…
But here’s the thing: Even if the bill isn’t enacted, the legal cannabis genie is already out of the bottle.
You see, the states have taken matters into their own hands. And right now, they’re the main catalyst behind this unstoppable trend.
Today, I’ll tell you what they’re doing – and why now’s the time to add some exposure to legal cannabis to your portfolio…
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Before I get to the good news, let me address the elephant in the room: the brutal price action in the cannabis space.
The ETFMG Alternative Harvest ETF (MJ) tracks 37 of the top cannabis companies. As I write, it’s down about 33% year-to-date.
You just need to check the headlines to see why:
- Major players like Aurora and Canopy Growth have reported below-expectation earnings.
- Officials caught Canadian producer CannTrust using unlicensed grow rooms.
- The vaping “crisis” is scaring investors.
There’s no denying it. Sentiment in the cannabis space is god-awful right now.
But at PBRG, this is the type of setup we look for: a massive, unstoppable trend paired with bargain, clearance-rack share prices…
As Teeka Tiwari wrote on Thursday:
To make a fortune in the markets, you just need to find an industry at the very beginning of a massive, multidecade trend. If you can get the growth trajectory right, you don’t need perfect timing. The phenomenal growth of the underlying trend will bail you out.
And thanks to the states, the legal cannabis trend is only going to get bigger…
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States Taking Action
So far, 33 states have legalized medical cannabis. And 11 have passed laws allowing recreational use.
Looking ahead to next year, at least six more could vote on recreational cannabis initiatives:
- Arizona: Next year, the state will make its second attempt to pass a constitutional amendment to legalize cannabis use for adults. Remember, both California and Oregon needed second tries to pass legalization in their states.
- Arkansas: Medical cannabis is already legal in the state. But next year, voters could see three constitutional amendments legalizing marijuana. All three are in the signature-gathering stage.
- Florida: Like Arkansas, Florida has legalized medical cannabis. So an amendment to legalize recreational use is the next logical step. The initiative is still gathering signatures. But next year, we could see the third-most populous state vote to greenlight small amounts of cannabis for recreational use.
- Missouri: This is another state that’s legalized medical marijuana. And Missourians could also vote next year to legalize recreational cannabis. The proposed constitutional amendment would make it legal to use, grow, and sell cannabis at the commercial level.
- New Jersey: The Garden State came close to legalizing recreational cannabis this year. But the effort fell apart at the finish line over tax rates and expungement issues. Lawmakers have been debating a new bill since then. With surrounding states passing legalization efforts, New Jersey doesn’t want to miss out on the tax revenue.
- South Dakota: South Dakota is the smallest by population and only state of the six that hasn’t legalized medical cannabis yet. But if the proposed initiative passes, it’d be a turning point for the Midwest.
Now, we’re not saying all six of these states will legalize recreational cannabis next year. But if they do, the combined population of their adult markets would be 37 million.
And these markets can grow quickly. For instance, Oklahoma passed medical cannabis laws in October 2018. And already, sales are on pace to hit $350 million this year.
So while the federal government drags its feet, states are taking matters into their own hands. And that gives the legal cannabis market plenty of runway for growth.
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How You Can Profit
To be clear, there’ll be more volatility and negative headlines ahead as this space matures. But as Teeka says, we’re still in the early innings with legal cannabis…
And to take advantage of the recent sell-off, look for cannabis companies with at least double-digit sales growth, little debt, and cash and equivalents making up 20% of the market cap.
If you’d like broader exposure, consider a small stake in MJ. As I said, it holds a basket of the top cannabis plays. And when the violent rebound comes – which it will – shares will shoot higher.