Pot stocks took a hit Thursday after U.S. Attorney General Jeff Sessions was reported to be rolling back the Cole Memo, an Obama-era policy diminishing federal interference in state-sanctioned cannabis operations.
Although details have not yet been disclosed, the new policy, according to the Associated Press, will free federal prosecutors in relevant states to enforce federal law as aggressively as they choose. Its potential effects remain unclear.
What This Means
Worst-case scenario is that this move initiates more aggressive federal activity or pointed crackdowns, but that may not be the case at all.
“We don’t know if this will be a modestly severe impact or potentially barely any tangible impact at all,” Chris Walsh, editorial vice president of Marijuana Business Daily and Marijuana Business Magazine, told Benzinga. “I don’t think the sky is falling by any means.”
Potential disinterest on the part of federal prosecutors, compounded by a lack of federal enforcement resources, justify his hope in limited impact.
“The silver lining is that if there’s going to be a crackdown by the federal government, there’s just too much of an interest in the medical side as well as the states rights issues, it’s going to prompt a backlash hopefully from Congress,” Brochstein said. “They will not necessarily legalize cannabis but certainly demystify or clear up all this gray area because the whole industry is built on an executive order, which is crazy. Maybe when it’s all said and done, it will be very clear what states can do and what they can’t do, and it will be a law instead of an executive order.”
Potential Immediate Consequences
All in all, Walsh is confident the fallout will be minimal.
“Trying to put this genie back into the bottle is going to be impossible,” he said. “....The industry is very strong, it has a lot of support, and I’m confident it’s going to weather the storm.”
Walsh asserted that reversing social and legal progress around the $6 billion industry will prove “extremely difficult” considering its momentum and economic impact.
By his assessment, the industry has proven too valuable to many states witnessing job creation, startup activity and new investments. He anticipates 50-percent revenue growth this year, particularly as the California market opens to recreational use.
How To Trade The News
ETFMG Alternative Harvest ETF MJX fell 8 percent and Innovative Industrial Properties Inc IIPR 16 percent on the news, while other exposed U.S.-traded players, including GW Pharmaceuticals PLC - ADR GWPH and Zynerba Pharmaceuticals ZYNE, also trended down.
“It’s going to be viewed negatively,” Brochstein said. “I don’t think it will necessarily be negative, but it’s going to really sap sentiment over the next few days.”
Even some Canadian players caught the drag, with Canopy Growth Corp TWMJF and Aurora Cannabis Inc ACBFF each falling more than 6 percent.
“Some industries in other countries are relying on U.S. investment and expertise to get their cannabis industries moving, and when you have turmoil here, you’ll eventually see potentially some of the investment interest dry up and the business activity potentially slow down a little,” Walsh said.
But Brochstein attributes the dip in foreign cannabis players merely to the MJX performance and recent lack of buying pressure. His outlook on Canadian players remains positive amid threats to the U.S. market.
“Eventually, if things play out poorly, it’s probably to the benefit of these Canadian stocks,” he said. “If [investors] decide it’s just not safe to play in the United States, well Canada it is safe.”
Not only that, but the repression of emerging U.S. competitors could allow foreign companies to seize greater control of the global market.
Despite the potentially positive long-term implications, Brochstein doesn’t advise buying on the pullback yet because “a lot of speculative money has come into the market.” In fact, he sold a couple short-term positions on the report.
“It’s very important at times like this when the speculative tide shifts to make sure that you’re out of the names that are most speculative,” he said, warning that the bottom of those stocks is “zero.”
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