'The market's ripping right now': Cannabis investors react to a head-spinning 24 hours in Washington

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jeff sessionsAssociated Press/Carolyn KasterAttorney General Jeff Sessions pauses before speaking at the Global Forum on Asset Recovery (GFAR) at the International Finance Corporation in Washington, Monday, Dec. 4, 2017, about anti-corruption efforts of the Trump administration and other topics.

  • It's been a head-spinning 24 hours in the news cycle, particularly for investors in the scorching-hot cannabis sector.
  • While cannabis bulls cheered Attorney General Jeff Sessions stepping down - and Rep. Pete Sessions' loss - they said the federal government needs to clarify rules around banking in the industry before big institutions jump in and the market really opens up.
  • That being said, the last 24 hours "is the first time I see the light at the end of the tunnel," a cannabis CEO told Business Insider.

It's been a head-spinning 24 hours in the news cycle, particularly for investors in the scorching-hot, but often volatile, cannabis sector.

In the last day or so, Michigan became the first state in the Midwest to legalize marijuana. Bright-red Utah and Missouri voted on legalizing marijuana. And two of the most anti-marijuana politicians in Washington, Rep. Pete Sessions, and Attorney General Jeff Sessions, were kicked to the curb.

On top of all that, Canadian marijuana producer Tilray's stock gained over 30% immediately after Sessions announced he was stepping down on Wednesday, which boosted the entire North American Marijuana Index by over 15%.

"The market's ripping right now," said Morgan Paxhia, a managing partner at the San Francisco-based Poseidon Asset Management.

What that shows, Paxhia said, is "how much investor demand is out there relative to what they're able to buy." Tilray, as a Canadian operator, won't necessarily directly benefit from a US attorney general with a more marijuana-friendly stance.

Read more: Marijuana companies are using a 'backdoor' strategy to tap the public markets - and it's fueling an M&A boom

"It's just a stock they [investors] can play to feel like they're getting exposure to the cannabis movement," Paxhia said.

To Todd Harrison, the founding partner of CB1 Capital, a cannabis-focused hedge fund, these huge swings in the cannabis sector are just a sign of "shaking out the weak hands," and putting the shares in "firmer accounts."

All this has led the many cannabis bulls to predict that there will be some federal movement on marijuana legalization - or at least to allow cannabis companies to access regular banking services - in the near future.

states where marijuana legal 4x3Skye Gould/Business Insider

Paul Rosen, the CEO of Tidal Royalty, a Toronto-based firm that provides financing to US cannabis firms, said pending legislation like the bipartisan STATES Act - co-sponsored by Sens. Elizabeth Warren and Cory Gardner - is the most likely path for the federal government to clarify its position on the current patchwork of state-legal cannabis industries.

If passed, the STATES Act would exempt states that have legalized marijuana from the Controlled Substances Act, effectively removing the ongoing conflict between state and federal law. The Act would also clarify rules around banking and tax deductions, allowing cannabis to operate like any other industry.

And this, said Brady Cobb, an attorney and the CEO of SOL Global Investments, is what would finally let big institutions - like BlackRock and Goldman Sachs - to "jump headlong" into the US cannabis operators.

"This is the first time I see the light at the end of the tunnel," Cobb said.

Read more: A competitor is emerging to challenge the marijuana retail chain dominating the industry, and it just closed a $640 million acquisition

While Sessions stepping down was "positive on the margin," Harrison said clarity around banking rules is the more "meaningful catalyst" for the cannabis industry.

"The bulls are training their ears on that," Harrison said.

For its part, BlackRock's president, Rob Kapito, said last week his firm "will be investing" in the cannabis industry, but because most bank custodians won't clear cannabis stocks, they'd have to wait.

The first likely targets for institutional investors, according to Paxhia, are the billion-dollar retail cannabis companies that operate in multiple state markets, like MedMen and iAnthus, known in the industry as multi-state operators.

Big institutions are "stuck with the law of large numbers," Paxhia said. They have to focus on deals worth hundreds of millions that will actually "move the needle" on their balance sheets, he added.

"Otherwise, what's the point in terms of risk?" Paxhia said. "It's a headache for compliance."

And to most investors in the space, it's still early innings for the cannabis industry.

"In the context of 30,000 years of humanity's relationship with cannabis, 90 years of propaganda is like a pimple on an elephant's ass," Harrison said. "The best catalysts are still in front of us."

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