Insiders Ramp up Pot Stock Purchases

Dear Outsider,

When President Biden took office in January 2021, he made a lot of big promises.

One of those promises, which can still be found on his campaign website, was to decriminalize cannabis use at the federal level:

Biden will work with Congress to reform federal sentencing and provide incentives to state and local systems to do the same. He will end, once and for all, the federal crack and powder cocaine disparity, decriminalize the use of cannabis and automatically expunge all prior cannabis use convictions, and end all incarceration for drug use alone and instead divert individuals to drug courts and treatment.

He also said he wanted to reschedule the plant and expunge sentences for those convicted of federal possession of marijuana.

And for the most part, he’s made headway on those promises, something cannabis advocates have cheered.

Last October, he announced a sweeping pardon for those with possession charges.

But investors in marijuana stocks haven’t been so lucky.

Last year, some of the biggest names in the industry were hit hard after post-pandemic sales slumped.

At one point last year, Canopy Growth Corp. (NASDAQ: CGC) was down 65% year to date, Aurora Cannabis (NASDAQ: ACB) was down 35%, Tilray (NASDAQ: TLRY) was down 15%, and Cronos Group (NASDAQ: CRON) was down 45%. The AdvisorShares Pure U.S. Cannabis ETF (NYSE: MSOS) — a marijuana ETF that tracks the industry — was down 52% at the start of 2023.

With the industry floundering, the question on everyone’s mind is this: Will weed be federally legalized? And if so, what does that mean for pot stocks?

What’s the Buzz?

The marijuana industry poses an interesting problem to lawmakers and investors alike.

In theory, lawmakers want to pass legislation that aligns with their constituents.

A recent survey from Key Investment Partners — a Colorado-based company that provides institutional-level capital to private cannabis companies — a whopping 90% of U.S. adults say marijuana should not be illegal.

Logically, it should follow that politicians will get behind the reefer.

As for investors, the cannabis space represents a burgeoning industry.

But the problem is it already experienced a massive boom-and-bust cycle from around 2016–2018.

And a lot of investors lost their shirts in a frenzy akin to the dot-com bubble. It was magnified by the fact that younger and inexperienced investors were hopping on board looking to 10x their money. While some of them did, many were left holding the bag.

So now that valuations are depressed, pot stocks may look attractive to some.

But there’s one glaring problem here.

It’s that until weed is federally legalized or rescheduled from a Schedule I drug — the same classification as heroin — institutions won’t touch the stocks.

According to Key Investment Partners, less than 2% of pot stocks are owned by institutions.

That’s why there’s such ridiculous volatility — there's no support base, just retail investors trying to get a good pump-and-dump.

Lack of federal support is also why the weed industry is still operating using only cash and debit, no credit allowed.

Banks won’t touch the stuff.

So until credit card companies come online, we’re unlikely to see another pop in the stocks.

Now, there’s been proposed legislation, including the SAFE Banking Act, which would have allowed banks to take money from dispensaries but was shut down in the Senate.

And last July, Chuck Schumer introduced the first-of-its-kind Cannabis Administration and Opportunity Act, which proposed to decriminalize the drug and let states set their own laws, but that hasn't passed either.

A promising bill going through the House would allow people holding a marijuana card to purchase firearms, which under the current laws is illegal.

But a secondary problem for cannabis stocks is lack of sales.

Now, compared with the alcohol and tobacco industry, cannabis sales are increasing, but we’ve got to remember consumer spending habits.

Especially in a recessionary environment, consumers will be less likely to buy more expensive goods, including at dispensaries.

So who in their right mind would buy pot stocks right now?

The Movers and Shakers

Even though there’s little institutional investment right now, the smart money is moving into the space.

That includes the super-traders of the world, like our very own lawmakers and C-suite executives.

Check this out...

Doing a quick search on CapitolTrades — a site that tracks congressional buying — I found that House Democrat John Yarmuth bought $30,000 worth of Cronos, House Republican Brian Mast bought Tilray, House Republican Chris Jacobs bought Innovative Industrial Properties, and the list goes on...

Digging deeper, I found insiders buying their own companies.

Village Farms International CEO Michael DeGiglio bought 10 million shares; the CFO, COO, and CEO of Corbus Pharmaceuticals all bought over 500,000 shares; Hydrofarm Holdings CEO and Chairman William Toler bought over 5 million shares; a director at Cronos bought millions of shares; and Innovative Industrial Properties Executive Chairman Alan Gold bought over 400,000 shares.

Does this mean something big like federal legalization is coming for the industry this year?

We’ll just have to wait and see.

After all, as Muddy Waters sang in his famous "Champagne and Reefer," "You know there should be no law if people that want to smoke a little dope."

Stay frosty,

Alexander Boulden
Editor, Outsider Club

After Alexander’s passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing. Check out his editor's page here.

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