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Cannabis Stocks in Holding Pattern Despite Positive Momentum

Cannabis Stocks in Holding Pattern Despite Positive Momentum

This could be a brilliant spring for cannabis stocks after years of frustration for investors, as some sort of federal reform appears likely and new state-level decriminalization could provide an extra boost. 

But so far, stock movement is being tampered by a long-running malaise that has investors hesitant to jump in and get burned again. 

Aurora Cannabis Inc (NASDAQ:ACB) is up over 17% over the past month, but is now in a holding pattern, even amid good news on the state legalization level. 

Canopy Growth (NASDAQ:CGC) has seen similar monthly gains, and the same holding pattern this week, while Tilray (NASDAQ:TLRY) has seen gains of over 20% this month, with investors now returning to a more cautious game.

It’s been a month of promising developments that could mean bigger and better things for cannabis in Q2–but all with a fair dose of caution.

On the state level, New Jersey has become the 18th U.S. state to legalize recreational marijuana and the 37th state to legalize medical marijuana.  

Yet, while the legalization of cannabis is growing steadily on the state level, progress on the federal level has been painfully slow. 

Earlier this month, the U.S. House of Representatives approved the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act, which removes cannabis from the federal Controlled Substances Act. This bill would allow states to approve their own cannabis laws. 

Analysis done by the Congressional Budget Office found that the passage of the MORE Act will increase revenues by over $8 billion in 10 years and significantly reduce federal prison costs.

Once the prohibition is over, it will also end some 1.5 million marijuana related arrests annually, where at least third it for nonviolent lower-level marijuana possession offenses.

However, this is far from a done deal. While it’s passed a second time in the House, the bill will face major opposition in the Senate, where it is heading now.

The new bill would allow adult Americans to buy and possess up to 10 ounces of marijuana without facing criminal penalties. But the draft also regulates banking, which is an urgent issue for cannabis companies in the U.S. Cannabis companies in states where marijuana has been legalized are overflowing with cash and nowhere to bank. Currently, due to federal restrictions, most federally regulated banks won’t service the industry, forcing cannabis companies to resort to cash-run operations.They end up spending a lot of that cash on advertising, hence the inundation of billboards in certain states. But not being bankable makes investors incredibly nervous, despite the recent growth spurt for cannabis.  

Last April, the U.S. House of Representatives passed SAFE Banking Act legislation that would allow banks to provide services to cannabis companies in states where it is legal.  

The marijuana industry is one of the very few sectors of the economy that has continued to grow amid the pandemic, as dispensaries and cultivation facilities were deemed as “essential.”

Sales of legal cannabis grew nearly 60% to $19 billion in 2020, representing a 71% increase over previous year. For the 2021, Americans spent nearly $25 billion on cannabis products. According to New Frontier Data, sales are expected to reach $35 billion by 2025.

Whether Q2 will be the cannabis breakout quarter or not, is all up to the federal government, and it’s a political hot potato that investors aren’t yet willing to go all-in on. In New Jersey, recreational sales are set to launch already on April 21st, but we think that this has already largely been priced into cannabis stocks, and there is not likely to be much more upside until there is a clear idea of how things might go down in the senate. 

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