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  • Writer's pictureTed Ohashi

Don't under-value U.S. cannabis stocks

The major reason we have been favouring cannabis companies with a U.S. base of operations is the change in control of the House that took place in the November 2018 midterm elections. In fact, it was anticipated. So when Representative Ed Perlmutter’s (D-CO) Secure and Fair Enforcement Banking Act (SAFE Banking Act) passed the House Financial Services Committee by a vote of 45 to 15 on March 28, 2019, it faced a friendly path than it has in the past five years.

The Democrats have long been more supportive of canopy and I expect an end in the blockade of pro-cannabis support for the years that Republicans held power and Peter Sessions (no relation to Jeff Sessions) held the position of Chairman of the House Rules Committee. Unlike other Committees that have responsibility in fairly narrow areas of policy such as Armed Forces or the Judiciary, the House Rules Committee oversees the output of all committees and decides if and in what order to schedule consideration of the floor of the House of Representatives. The general idea is that the Rules Committee allows the government in power to prioritize legislation in a timeline that is consistent with their commitments. Of course it can be used in another fashion which Pete Sessions did for the Republicans from 2013 until he was deposed by voters in November 2018. Under Chairman Sessions it was widely known that any pro-cannabis legislation had no chance of moving forward to the floor. This affected the process in two ways. First, committees tended not to waste time on bills that had no chance of moving forward and, second, any bills that did overcome the first hurdle were blocked by Pete Sessions and the Rules Committee.

The new Chairman of the Rules Committee is Democrat James P. McGovern who represents Massachusetts’ 2nd Congressional district and is regarded as one of the most Liberal of congressmen. Massachusetts is, of course, a recreational cannabis legal state. So I think we can conclude the blockade is broken and SAFE Banking will move to the House for consideration unless an even broader bill is passed.

After the 2018 midterms, the Democrats began the 116th Congress with 235 of the 435 seats compared with 200 for the Republicans. For a bill to pass the House, a simple majority of 218 votes is needed. SAFE Banking has 150 co-sponsors and assuming all of them are in favour, all it needs are 68 more votes. So I think it has a positive chance for approval. Of course, there are always surprises when votes are held. Some members have expressed disappointment because they feel that SAFE does not go far enough. So anything is possible but I think at the House level, this legislation has an excellent chance of passing. In fact, Chairman McGovern believes the SAFE Banking Act will pass easily and with bi-partisan support. That is a combination that will put a lot of pressure on the Senate.

After passing the House, a bill goes to the Senate. Here the picture currently is a little different than in the House. There are 100 seats in the Senate and 51 are needed to pass a bill. If there is a tie, the Vice President who is automatically the President of the Senate has a tie breaking vote. The Republicans increased their seats from 51 to 53 in the 2018 midterms. The Democrats had 45 seats and 2 seats went to Independents who sat with the Democrats. Independent Angus King represents the recreational cannabis legalized state of Maine and is a strong supporter of cannabis reform and Independent Bernie Sanders is a very strong supporter of cannabis and in 2016 became the first major Presidential candidate to endorse cannabis. Both King and Sanders were endorsed by the National Organization for Reform of Marijuana Laws (NORML) in 2018. So on the matter of marijuana, both Independents vote as Democrats. Vice President Mike Pence is an extreme conservative and strongly anti-cannabis so a tie goes to the naysayers.

With between 62% and 65% of Americans in favour of legalization according recent Pew Research Center and Gallup polls, it remains to be seen how the Senate Republicans will vote on a pro-cannabis bill. It is always possible that amendments will be made but I think the basic thrust of the bill will remain. And if there is overwhelming support in the House with several Republicans voting in favour, the odds increase greatly. Finally, as I said earlier, for the first time since, at least they will be put to the test.

If the SAFE Banking Act or a form of it passes into law, I think it will bring more than just normal banking services to the U.S. cannabis industry. On the business front, I can see investor dollars following banking support relatively quickly. On the political front, I suspect it will like a dam bursting and we will see a number of additional pro-cannabis bills passed in the U.S. If full legalization does not occur before the 2020 election, I think it will be a major election issue in the next election and a vote starved President Trump could well be leading the charge for legalization.

One stock that fits the bill and is carrying positive momentum into this week is Sunniva (CSE: SNN). The company just reported earnings (see below) and is still under-followed, under-appreciated and under-valued. But that seems to be changing at long last and I think supporters will benefit greatly as this occurs.

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