IHS Markit: Pot stocks rally on Trump commitment and Canada vote
24 May 2018 New York
Image: Shutterstock
US marijuana stocks have shown a rally on Trump’s legislation commitment, according to Samuel Pierson, director of securities finance at IHS Markit.
Pierson, who released an analysis and commentary on the subject on 22 May, also stated
that the upcoming Canadian Senate’s vote, which could make the recreational use of marijuana legal throughout the country, could also see a rally on such stocks.
The analysis found marijuana related market cap was down $2 billion year-to-date, despite a $3.4 billion quarter-to-date advance.
Pierson said: “A key development for the US marijuana industry came on 13 April, when President Trump confirmed he had promised Colorado Senator Cory Gardner that US Attorney General (AG), Jeff Sessions revocation of the Cole memo will not affect the state’s legal marijuana industry.”
He added: “That was a very timely update, with the combined market cap for marijuana related stocks hitting a 2018 low on 9 April. Since then, the market cap of those stocks has risen by $3.4 billion, a 13 percent increase.”
Pierson found that in terms of short balances, short sellers “have not backed down”, increasing the combined short position in marijuana related stocks to nearly $2 billion, a level just below the all-time high on 24 January.
He commented: “Since that last high point in short positions, the total market cap has fallen by $5.5 billion, or 15 percent. Short sellers have generally increased positions on a lag to advances in share prices, but have kept up the overall pace with the total market cap increasing by 92 percent since the start of Q4 2017, while short balances have increased by 102 percent.”
Pierson also found a correlation in terms of shorted stocks and the largest market caps. He said: “A list of the most shorted marijuana stocks is also a list of those with the largest market caps, a reflection of the capacity challenges for short sellers, which have contributed to elevated borrow costs, particularly at the start of the year.”
The Canada Senate’s vote is due to go ahead on 7 June — a legislation which would make regulated recreational marijuana use similar to the laws on tobacco.
Though, as Pierson explained, Sessions waded in on the issue, sending a letter to US attorneys back in March, which proposed greater use of the death penalty in large scale drug prosecutions”, of which Pierson stated “some viewed as an extension of his dim views on recreational marijuana.”
Sessions also decided to rescind the Cole memo in January. The Cole memo was an Obama era direction from the deputy AG Robert Cole stating that the Justice Department would not expend resources enforcing federal marijuana laws in states which had some form of legalisation.
Pierson commented Session’s revocation of the Cole memo, “may have actually aided in the pro-legalisation effort, causing congressman and governors from states which currently have legalised medical and/or recreational usage to dig in, ultimately eliciting the promise from Trump mentioned at the outset.”
He predicted: “With the legislative path in the US and Canada looking increasingly clear, and with a near term catalyst in the 7 June vote, there may be further room to the upside for the group.”
Pierson concluded: “Marijuana related stocks remain highly shorted on valuation, ahead of what appear to be green pastures from a regulatory perspective. The shares are in many cases priced to perfection; though from a short seller’s perspective those prices may be rational after a consideration of borrow costs.”
“A known catalyst on 7 June may prove a further tailwind as these stocks continue to rally off the lows, however short sellers have shown little fear of a further breakout, with total short balances nearly back to the January high over $2 billion.”
Pierson, who released an analysis and commentary on the subject on 22 May, also stated
that the upcoming Canadian Senate’s vote, which could make the recreational use of marijuana legal throughout the country, could also see a rally on such stocks.
The analysis found marijuana related market cap was down $2 billion year-to-date, despite a $3.4 billion quarter-to-date advance.
Pierson said: “A key development for the US marijuana industry came on 13 April, when President Trump confirmed he had promised Colorado Senator Cory Gardner that US Attorney General (AG), Jeff Sessions revocation of the Cole memo will not affect the state’s legal marijuana industry.”
He added: “That was a very timely update, with the combined market cap for marijuana related stocks hitting a 2018 low on 9 April. Since then, the market cap of those stocks has risen by $3.4 billion, a 13 percent increase.”
Pierson found that in terms of short balances, short sellers “have not backed down”, increasing the combined short position in marijuana related stocks to nearly $2 billion, a level just below the all-time high on 24 January.
He commented: “Since that last high point in short positions, the total market cap has fallen by $5.5 billion, or 15 percent. Short sellers have generally increased positions on a lag to advances in share prices, but have kept up the overall pace with the total market cap increasing by 92 percent since the start of Q4 2017, while short balances have increased by 102 percent.”
Pierson also found a correlation in terms of shorted stocks and the largest market caps. He said: “A list of the most shorted marijuana stocks is also a list of those with the largest market caps, a reflection of the capacity challenges for short sellers, which have contributed to elevated borrow costs, particularly at the start of the year.”
The Canada Senate’s vote is due to go ahead on 7 June — a legislation which would make regulated recreational marijuana use similar to the laws on tobacco.
Though, as Pierson explained, Sessions waded in on the issue, sending a letter to US attorneys back in March, which proposed greater use of the death penalty in large scale drug prosecutions”, of which Pierson stated “some viewed as an extension of his dim views on recreational marijuana.”
Sessions also decided to rescind the Cole memo in January. The Cole memo was an Obama era direction from the deputy AG Robert Cole stating that the Justice Department would not expend resources enforcing federal marijuana laws in states which had some form of legalisation.
Pierson commented Session’s revocation of the Cole memo, “may have actually aided in the pro-legalisation effort, causing congressman and governors from states which currently have legalised medical and/or recreational usage to dig in, ultimately eliciting the promise from Trump mentioned at the outset.”
He predicted: “With the legislative path in the US and Canada looking increasingly clear, and with a near term catalyst in the 7 June vote, there may be further room to the upside for the group.”
Pierson concluded: “Marijuana related stocks remain highly shorted on valuation, ahead of what appear to be green pastures from a regulatory perspective. The shares are in many cases priced to perfection; though from a short seller’s perspective those prices may be rational after a consideration of borrow costs.”
“A known catalyst on 7 June may prove a further tailwind as these stocks continue to rally off the lows, however short sellers have shown little fear of a further breakout, with total short balances nearly back to the January high over $2 billion.”
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