The Outlook for Cannabis and Marijuana Stocks
The ride for cannabis stocks over the past nine to twelve months has been rocky, to say the least. As you can see on the chart below, pot stocks had huge momentum going into the election and further into the inauguration of President Biden. With a Democratic president and a narrow majority of Democratic Congressmen and Congresswomen in the House, the hope was that there would be relaxed regulation around marijuana usage and also legislation to ease restrictions around how cannabis companies can do business. Neither has happened and price momentum has waned in kind.
Clearly the largest issue with cannabis stocks is the regulatory climate. Many lawmakers cannot agree on how to decriminalize marijuana, which remains a Schedule 1 substance. You also have to work out how interstate commerce laws would come into play given that marijuana is still a Schedule 1 substance. Lastly, President Biden has explicitly said that he "still opposes marijuana legalization" according to a Politico written article on July 14th, 2021. Washington seems to have larger priorities with infrastructure taking center stage, moving legalization of marijuana federally to the back burner for the time being. If we see Republicans take back the House and the Senate in the midterm elections in 2022, this would also provide headwinds for cannabis stocks.
The Fundamental Case
In a call to investors on August 10th, 2021, Hedgeye Risk Management cannabis analyst Howard Penny noted that "Cannabis companies in the US right now generate roughly $20 - $30 billion in legal sales. Illegal sales could be anywhere from $30 - $50 billion on top of the legal sales!" Needless to say this is a large and legitimate industry if there were to be broad reforms to legalization and a more favorable climate for businesses. Sales year-over-year for states that allow recreational use was up over 24% and for states that approve medical use, sales were up nearly 47% year over year! In 2022, we expect states like New York, Connecticut, and New Jersey expected to pass legislation allowing recreational use, further supporting increased sales.
Our inclination is to keep a very short leash on this sector as a whole as there are significant headwinds from a regulatory standpoint despite the fundamental argument outlined above.
If you have any questions, please feel free to reach out to the team at Gordon Asset Management!
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