Cannabis Stocks May Be 2021’s Big Winners

Cannabis leaf over a hundred dollar bill
Credit: Shutterstock photo

Democrats’ long-awaited blue wave failed to materialize in November, but after Georgia’s Wednesday election, a green wave may be imminent.

Shares of pot companies jumped on the news of Democratic Senate candidates Raphael Warnock and Jon Ossoff defeating their Republican opponents. Canopy Growth Corp (CGC), the largest cannabis company by market cap, jumped 15%. Other industry leaders like Cronos Group (CRON) and Aurora Cannabis (ACB) are up 22% and 10%, respectively.

Marijuana stocks have outperformed equity markets since Joe Biden – who vowed on the campaign trail to decriminalize marijuana – was elected President. The Cannabis ETF (THCX), which tracks 30 pot stocks, is up over 60% since the beginning of November. 

Despite those returns, investor confidence has been restrained by the seeming likelihood of Republican Senate, which dimmed the prospects of legislation decriminalizing or even legalizing marijuana. The surprising election of Warnock and Ossoff hands control of the Senate to Democrats, changing the entire outlook.

“Everything suggests that a Biden administration will federally legalize cannabis,” said John Ramsay, CEO of Infinite CBD, a Colorado-based cannabis company. “If this happens, it is going to create more multistate operators, broaden the cannabis industry, create more jobs, generate more taxes, offer more products, produce more incomes in lower income sectors, and undoubtedly cause a spike in the value of cannabis stocks."

Any federal bill to decriminalize or legalize cannabis would come on the heels of successful state referendums in November, when Montana, South Dakota, Arizona and New Jersey all voted to legalize recreational marijuana use. Those measures reflect the increasingly bipartisan acceptance of the drug. Following the 2020 election, 15 states have now legalized recreational marijuana and 34 states have legalized medical marijuana. 

Cumulatively, these efforts represent a sea change in public opinion from just eight years ago, when Colorado became the first state to legalize recreational use. Even so, not all industry experts are bullish on a federal legalization package.

“While this is an exciting time for the industry, I believe the reality of legislative priorities, narrow majorities in the House and Senate, as well as a lack of scientific research on cannabis will cause federal legalization to take longer than the industry would like and some prognosticators are predicting,” said Anthony Coniglio, CEO of NewLake Capital, a cannabis real-estate investment vehicle.

“There is a huge misunderstanding among many investors on this issue,” adds Dan Ahrens, a PM at Advisorshares who manages two cannabis ETFs (MSOS and YOLO). “There will most certainly be a great deal of cannabis reform, but it falls short of a full federal, adult use legalization.”

Ahrens believes that investors instead should expect piecemeal reforms, such as changes to regulations around cannabis banking, DEA rescheduling and decriminalization, and reformations to Section 280E of the tax code (which pertains to businesses trafficking in controlled substances).

Highlighting pushback from within their own party and competing policy priorities, House Democrats in September postponed a vote on legislation to decriminalize marijuana at the federal level, citing pushback from moderates and the need to focus on providing relief around the coronavirus pandemic. With the Senate now deadlocked at 50 Democrats and 50 Republicans, Biden may struggle to pass legislation if moderate Democrats – in particular, West Virginia Senator Joe Manchin – side with conservatives.

Regardless of whether there’s full legalization or piecemeal reform, industry observers agree that U.S.-based cannabis companies are in a better position than their Canadian counterparts.

“The top revenue-generating cannabis operators in the U.S. are already outselling their counterparts in cannabis-legal Canada and, given the potential opportunities with U.S. cannabis legalization and national rollout, we see significant positive potential ahead,” said Stuart Titus, CEO of Medical Marijuana, Inc.

Ahrens echoes that assessment, writing that he “[does not] see a path for Canadians to enter the U.S. (other than CDB business or minority ownership partnerships) anytime in the foreseeable future,” and noting that he's a “strong believer” in leading U.S. multi-state operators, singling out Green Thumb Industries (GTBIF), Curaleaf (CURLF), Trulieve (TCNNF), and Cresco Labs (CRLBF). 

Specific companies aside, the ongoing shift in the U.S. electorate’s attitude bodes well for the pot industry’s long-term future.

“The reality is that the people have spoken resoundingly on this issue with massive electoral victories for cannabis across the country,” commented Kris Kane, president of cannabis investment firm 4Front. “As far as the American public is concerned, this issue is over,” he added. “We just need politicians to catch up to the voters.”

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

John Hyatt

John Hyatt is a freelance journalist covering financial services, market structure, stocks and IPOs, and private equity. Prior to entering journalism, John worked in public relations for clients in financial services, investment management, fintech and cryptocurrency. John is currently receiving his M.A. in business and economic reporting from NYU as a Marjorie Deane fellow.

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