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Congress Just Legalized Hemp: Buy the Rumor Sell the News? Not so Fast

http://catalysttraders.net/congress-just-legalized-hemp-buy-the-rumor-sell-the-news-not-so-fast


Written by: Bill Cox 12/12/2018

The House has joined the Senate in passing the historic Farm Bill into law today, and effectively, they have Federally legalized hemp and CBD. It will become official with Trump’s signature which could come as early as this week, or hopefully next week at the latest.

The hemp industry is expected to grow at a staggering rate over the next several years. CBD sales alone are expected to grow 4,000% by 2022. Hemp is estimated to have over 50,000 industrial uses from biodegradable plastics and fuel, to textiles food and even beauty products.

However, cannabis industry investors are still reeling from a major retracement off the highs after a multi-year run into the historic implementation of the recreational legalization of cannabis in Canada on October 17th, 2018. The stocks have essentially fallen ever since, (with the exception of a recent uptick). This was a clear buy the rumor sell the news scenario. Valuations were at nosebleed heights as stocks went exponential into the news, which is a tell-tale sign of “sell the news” risk.

Hemp stocks on the other hand seem to be in the exact opposite situation. They sat dormant in the weeks leading up to the House and Senate vote and only started moving higher early this week. The process then moved so fast it seemed to catch many off-guard, but there was some evidence of hype starting to set in with the Senate’s passage after the bell yesterday. Now that the House has passed it as well, it should set off a buying frenzy in the morning.

Although some stocks have moved up dramatically in the last few trading days, most are well off the highs and not far off year lows. Considering the signing of the Bill is yet another catalyst event in and of itself, now is most certainly not the time to sell. However, after such a dramatic sell the news event in Canada a couple months ago, it is no wonder cannabis industry investors are fearing another disappointing end to a major catalyst event. It can be argued there is a potential for a collapse in hemp stocks following the “news”, which in this case, would be Trump signing the legislation into law. In my opinion, this fear will not become realized for several reasons:

A few days (or even a few weeks) is not enough time to “price in” something so fundamentally significant

Market caps are still quite small for most US hemp stocks

Federal legalization unlocks investment capital from entities that may have steered clear of an industry that was previously dealing with what was considered a Schedule 1 drug.

This last point is the most important. Many US hemp stocks are actually headquartered in Canada so that they may have access to capital funding and banking. Crop [US ticker: $CRXPF] is a good example. Although most of their business is being conducted in the US, their headquarters is in Vancouver, Canada.

Kristin Nichols, of HempIndustryDaily.com recently did an interview with several hemp industry leaders including Robert Leaker of Vitality CBD Natural Health Products. His company is based in Montana and they both produce and manufacturer hemp. They are thought to be the nation’s single largest hemp producer, with 20,000 acres grown this year. His take on the industry is this:

The Farm Bill passage would end the need for U.S. hemp companies to list in Canada, instead allowing them to directly access U.S. exchanges such as the Nasdaq or New York Stock Exchange.
“We see access to capital, as well as access to large potential buyers of CBD, to be all opening up because of this,” Leaker said.

“Until it’s federally recognized that CBD is not a Schedule 1 drug, it’s very difficult for banks and investment capital to come into this space.”

This is exactly what has happened with this Farm Bill. Hemp and CBD will become Federally legal with the signature of President Trump. The industry will expand exponentially for years, so pricing in such growth is hard to accomplish in a matter of days. Although the stocks cannot feasibly move straight up, and will have significant pull-backs and plenty of volatility in the coming weeks, the trend should remain up for months and potentially even years. I am not saying to go out and buy hemp stocks, but that is what I am doing and I have no intention of selling on the news.

By Bill Cox| December 12th, 2018|Catalyst Trading|0 Comments