The SAFE Banking Act News Cycle Begins: Should Investors Buy or Punt the Hype?
With the SAFE Banking Act scheduled for markup in House Committee next Tuesday, weedstocks investors craving U.S. (MSO) exposure have a difficult decision to make: chase into the hype now—lest risk prices moving even further away—or wait out a potential media-fueled bull trap. We explore this narrative further.
Unless something unlikely transpires at the eleventh hour, it appears a congressional committee will hear and vote on comprehensive legislation that would expand marijuana businesses’ ability to access banking services this Tuesday. Although two ranking minority GOP lawmakers on the full House Financial Services Committee are attempting to postpone the process, the proceeding will likely go on. Even so, it gives indication that the SAFE Banking Act—whatever form of it reaches the finish line—will not simply be rubber-stamped into law. The battle lines are just being drawn.
Will SAFE banking reform boost U.S. #weedstocks next week? Maybe, b/c CNBC and media hype will amplify. Realistically, still some time before things get interesting. US House Committee on Fin Services is not live-streaming event. Here’s where the legislative process stands now: pic.twitter.com/9Qzo3HkJ33
— Benjamin A. Smith (@BenjaminA_Smith) March 23, 2019
Even though we’re literally in the bottom-of-the-first inning in terms of potential implementation, it won’t stop the media hype machine from gearing-up. It never does—and perhaps it shouldn’t: comprehensive cannabis banking reform is a huge deal, as it potentiates multi-state operators’ (MSO) ability to access capital, potentially list on major U.S. exchanges, and access banking services comparable to other legitimate businesses. Without the casus belli of federal money laundering charges hanging over their heads, Tier-1 banks such as Citigroup, Wells Fargo & Company, Bank of America and others can enter the fray. Additional major U.S. investment banks beyond Cowen and Piper Jaffray would likely join the party. It’s a huge deal—assuming the bill maintains its integrity.
Perhaps front-running the news cyxle to come, U.S. marijuana staged a defining divergence against its Canadian counterparts last week. While Tier-1 LPs struggled in the face of mostly supportive conditions ex-March 22nd (QQQ ↑0.11%; HMMJ ↓1.05% vs. U.S. Marijuana Index ↑5.72%), the collective numbers don’t tell the whole story. Several Canadian leadership stocks broke down while several leadership MSOs staged impressive breakouts.
To be sure, much of last week’s MSO good fortune had nothing to do with SAFE Banking Act front-running at all. After the bell on Wednesday, Curaleaf Holdings announced impressive growth, guidance and a major pharma distribution agreement that had the sector buzzing. Curaleaf proceeded to rise ↑31.86% on volume that smashed previous records by over 2-times, and tacked-on another ↑7.50% in Friday’s session to boot. In particular, with Curaleaf reiterating managed revenues of $400 million in FY 2019, it inspires confidence that top-end MSO hockey stick growth is genuine.
Still, other prominent U.S. MSOs absent of material news flow soared just as well, as a clear rotation into U.S. issues was observed.
One component to consider heading into next week is the individual ability to weather draw-down. Asssuming investors don’t over-leverage positions, and maintain longer-term time horizons, simple buy & hold strategies may be warranted. After all, if the SAFE Banking Act eventually passes, presaging eventual de-scheduling of cannabis on the federal level, many would agree Tier-1 MSOs will be trading at higher future multiples. Indecision over entry points now—in combination with monster catalysts straight ahead—is a recipe for letting prices getting away from, what some may coin, “reasonable” levels today.
However for the price sensitive and those uncomfortable tying-up capital into potentially unsound entry points, some risk exists here. The ideal time to build positions are low-volume accumulation phases—when stocks bleed lower—not chasing into media hype. We’ve already seen how some MSOs were significantly bid-up this week, and broad market index direction is an iffy proposition after historic bull runs. There’s also a small risk that the congressional committee delays proceedings, which would solidify the fact that SAFE Banking Act passage will be a grueling battle throughout the entire legislative process.
Thus, next week will be an interesting one for investors. Will MSO leadership stocks continue FOMOing based on hype & hope, or will retail once again get shaken down ex post facto after purchasing into media hype which is just beginning?
The question of whether cannabis investors should buy into next week’s banking reform hype is a sticky one. Strictly based on expectations of a material outcome—probably not. After all, there’s likely several months before the process enters the late innings, and heavy wrangling lies ahead assuming the bill makes it to congressional review. There’s no guarantee the bill will pass—or even look similar to its current form—at this early juncture. The ball game has just begun.
However, for traders looking to capitalize on a herd mentality-type moves, an opportunity could present itself. With SAFE Banking Act proceedings being streamed on the Hill, the media hype train will do its thing. This could generate added euphoria in the marketplace—above & beyond what we saw last week—granting impetus to MSO bids everywhere. With U.S. cannabis equities trouncing Canadian recently, we’re witnessing the power of upcoming U.S. catalysts in action. They are real and ongoing.
Either way, a buy & hold case can be made right now regardless, to protect against future front-running MSOs could experience as the banking reform process advances. But investors must realize there’s risk in chasing prices here, as neither bill passage nor endgame bill integrity is a sealed deal. As New Jersey’s iffy vote on a bill to legalize recreational cannabis for adult use demonstrates, there’s no guarantees of legislative victory—even in a deeply blue Legislature.
©2019 Midas Letter. All Rights Reserved.
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