Cannabis stocks jumped in early October, after President Joe Biden took the United States closer to federal marijuana legalization. But these stocks have since lost ground as Biden’s pronouncement does little in the short term to change the industry.
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Biden said he would pardon people convicted of the federal crime of simple marijuana possession, called on governors to make similar moves for convictions under state laws and ordered a review of the way marijuana is federally scheduled as a controlled substance. But that is a far cry from full legalization that would lead to a sustained rally in marijuana stocks.
“While Biden’s announcement is certainly progress, it was more of a political announcement than a sweeping impact on business,” says Jay Czarkowski, founding partner with consultancy Canna Advisors. “It doesn’t change any business dynamics. It doesn’t create any new business opportunities. It’s not anything bad or good for business.”
Industry’s Status Quo Still in Place
If you’re thinking about investing in cannabis stocks, part of your homework is to understand where the industry is at the moment.
Like many other companies, cannabis stocks have been under pressure because of inflation, higher interest rates and the general negative market sentiment as investors worry about a potential recession.
But these companies were already in a downtrend before the broader market took a turn for the worse. Cannabis stocks were underperforming after Democratic political gains in 2020 and 2021 failed to produce meaningful legislative reform, leaving companies to face a host of issues traditional businesses don’t.
Cannabis companies headquartered in the United States, or anywhere that marijuana isn’t legal, can’t raise money in the stock market by listing on the New York Stock Exchange or Nasdaq if they grow, process or sell marijuana, a Schedule I drug alongside heroin and LSD. (Many publicly traded cannabis companies are headquartered in Canada, where the drug is federally legal, or trade over-the-counter.)
They also face expensive paperwork to access the federally regulated banking system, as well as high taxes. Prohibition on interstate commerce means even large multi-state operators face inefficiencies.
Biden’s announcement in early October doesn’t change any of this immediately. But it may eventually help unlock reform from Congress, where a cannabis banking bill has been stalled by those who want wider-reaching legalization and social justice changes.
Biden’s announcement “is significant because it signals a first step by the Biden administration to change existing federal cannabis law,” says Matt Karnes, founder of consultancy GreenWave Advisors. “Nonetheless, uncertainty remains with respect to the nature, extent and timing of specific changes to federal policy.”
Still, there are plenty of positives for the U.S. marijuana industry, which has already taken great strides even while operating under federal prohibition. That means these marijuana stocks are primed to move significantly higher if meaningful federal reform does end up taking place.
[SEE: 7 Stocks That Are Good Inflation Investments.]
“I anticipate that most cannabis stocks will skyrocket once we truly legalize cannabis on the federal level,” says Andrew Bowden, CEO of dispensary franchisor Item 9 Labs Corp. (ticker: INLB). Until that happens “we will continue seeing these small wins along the way that will positively impact cannabis stocks,” he says.
A potential catalyst short of full federal legalization is potential passage of the SAFE Banking Act, which would greatly increase cannabis companies’ access to the federally regulated financial system.
“Once banks become allowed to enter the industry … cannabis companies will see a massive bump in profitability due to loans being at much lower rates,” Bowden says.
Now May Be a Time for Bargain Hunting
For now, even with the early October jump, marijuana stocks remain in a profound slump. For the investor with a long-term time horizon, this could be a good time for picking up some bargains.
“Now is the time to invest in cannabis,” Bowden says. “It may take some time for the stocks to bounce back from current economic challenges, but these low prices will not last for long.”
Those who want to take the leap need to do diligent research. While that’s true for any investment, it’s especially the case for marijuana stocks given the industry’s legal complications and newness.
“Many publicly traded companies have been operating at a loss for years,” says Cory Waggoner, CEO of Higher Yields Cannabis Consulting.
When it comes to investing in individual marijuana stocks, Cresco Labs Inc. (CRLBF), Trulieve Cannabis Corp. (TCNNF), Green Thumb Industries Inc. (GTBIF) and Curaleaf Holdings Inc. (CURLF) are on Czarkowski’s list of blue-chips.
“These are four solid companies with sound, experienced leadership plus efficient operations, [a] national footprint and excellent valuations,” he says. “These four companies are all good investments today.”
One way investors can hedge their bets is to buy exchange-traded funds, which provide exposure to multiple companies under one ticker symbol. This can cushion the blow if a few companies end up doing poorly but others do well. It also means the fund may not perform as well as a single company with blockbuster returns.
The AdvisorShares Pure US Cannabis ETF (MSOS) is a popular option that doesn’t hold stocks directly but opts for synthetic exposure via total return swaps. The ETFMG Alternative Harvest ETF (MJ) is a passively managed fund that tracks an index of globally listed cannabis companies that could benefit from medicinal and recreational marijuana legalization initiatives. A new option is the Roundhill Cannabis ETF (WEED), which came online in April.
Whether you pick individual stocks, ETFs or a mix of both, remember that Biden’s announcement is important, but there is likely a long way to go before significant hurdles are removed from the U.S. marijuana industry.
“This is a huge deal,” says cannabis industry consultant Kris Krane, who was president of multi-state operator 4Front Ventures Corp. (FFNTF) for more than a decade. “Never before has the office of president issued such a statement in support of cannabis reform. What was missing was a direct call to action for congressional reform, to challenge leaders to do more.”
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How to Invest in Marijuana originally appeared on usnews.com
Update 10/12/22: This story was previously published at an earlier date and has been updated with new information.
