The story of cannabis stocks in 2021 is, so far, a cautionary one. After surging in 2018/19 as early “meme stocks” then dropping back as reality set in, there was a lot of excitement coming into this year, when it was believed that a Democratic-controlled White House and Congress were likely to decriminalize if not actually legalize the industry at a federal level. That was understandable enough, but with a razor thin majority in the Senate and with other, much bigger, fish to fry, pot-related legislation took a back seat. Nothing substantive has been done to rectify the weird limbo in which pot companies operate and the best-known names in the industry are now trading at fractions of their highs achieved in February.
There are, however, reasons to believe that the enthusiasm for cannabis stocks was more mistimed than misplaced, and that 2022 could see many of them bounce back. The February highs still look overdone, but a more ordered climb based on business prospects rather than speculation wouldn’t be a bad thing at all.
There are two initiatives in the House that could change things. Ironically, the first, the States Reform Act, is sponsored by a Republican, Rep. Nancy Mace from South Carolina. The States Reform Act actually looks like a sensible piece of legislation. It would federally legalize the industry and impose a 3% federal excise tax and some regulation, but essentially devolve decisions to the state level. Given that 68% of Americans support legalization, that looks like a sensible approach but it, like so much that is sensible, has fallen afoul of partisan politics. It was seen by Democrats as an attempt to steal Chuck Schumer’s thunder on the issue, even though “thunder” hardly describes the failure to do anything to this point, so is very unlikely to gain enough support to pass Congress.
As of now, the best chance for pot stock growth comes from a piece of legislation known as the SAFE Banking Act. The SAFE Banking Act has already passed the House, because it was attached to the National Defense Authorization Act (NDAA), a “must pass” annual bill that funds the military. The wisdom and morality of attaching anything to a bill that protects the nation may be questionable, but such is the way of D.C.; plenty of other policy matters have passed that way under both parties so this isn't as unusual as it might seem on the face of it.
What remains to be seen is whether the Senate will pass the NDAA with SAFE attached, and there is a decent chance it could pass this month. If that happens, it will remove one of the biggest impediments to growth in the cannabis industry: Access to traditional banking. The lack of that has kept the industry fragmented and regionalized, even as more and more states have legalized the product.
Access to capital will probably cause a major shakeup in the industry as ambitious companies scale up, but ultimately that will mean growth, so spreading risk by investing in a few of the bigger, more ambitious companies such as Canopy Growth Corporation (CGC), Tilray (TLRY), or Cronos Group (CRON) may make sense. Or, if that is too risky, you can leave the stock selection to the experts by investing in a managed fund ETF, such as CNBS or MSOS.
Whatever you do, of course, pot stocks are still risky. It is a young industry that faces serious hurdles if it is ever to fulfill its potential, but that potential is huge. According to Fortune Business Insights the market was over $20 billion in 2020, and is projected to reach nearly $200 billion by 2028. That is some serious growth and, with competition between the political parties to get on the right side of history emerging, the pathway may be a lot clearer in a couple of months, making the risk one worth taking.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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