There’s no doubt that important changes in the cannabis industry, such as legalization efforts, directly impact weed stocks. On the news of possible federal legalization, marijuana stocks usually trade higher. However, with so many delays and industry experts opining that federal legalization will probably not happen any time soon, cannabis stocks have taken a dive.
Since the beginning of the year, some of the biggest names in the industry have declined more than 30% compared to S&P 500 SPY, which plummeted by 13.76%, and SPDR Dow Jones Industrial Average ETF Trust DIA that dropped 9.84%.
For example, cannabis giant Tilray Brands TLRY plunged 32.61%, Canopy Growth CGC slid 38.60%, Curaleaf Holdings Inc CURLF sunk 32.88%, Green Thumb Industries Inc GTBIF dived 38.02%, and Trulieve Cannabis Corp TCNNF fell 46.03%.
The question is: will pot stocks continue to dive amid federal delays or are there any positive signs for their growth?
According to BTIG analyst Camilo Lyon, cannabis is in a “regulatory recession” considering that the stocks still trade at low multiples to their earnings and many businesses have experienced growth rates of 60%, writes Bloomberg.
“If there were any doubt about the demand profile for the category, one only needed to visit an adult-use dispensary this past weekend in New Jersey to see hourlong lines of people waiting to buy legal cannabis,” Lyon said in an April 26 research note. “Cannabis, with its many federal and state regulatory restrictions still in place, has been driven into recession by slow-moving policy changes.”
Lyon, however, noted that the regulatory recession may soon be over. He pointed to the SAFE Banking Act, which aims to protect financial institutions seeking to provide services to state-legal marijuana businesses, as having a good chance to pass.
And he's not alone. Other industry experts also agree.
Andrew Lokay, an analyst from Beacon Policy Advisors LLC, said in March that the MORE Act has only a slim chance of passing the Senate, while the SAFE Banking Act stands a better chance of becoming law. The MORE Act removes cannabis from the federal Controlled Substances Act, allowing states to legalize cannabis, its production and sale, free from federal interference.
"Once it has become clear that it doesn't have enough support to move forward....at that point, [Senate Majority Leader] Schumer could allow SAFE Banking to be attached as an amendment to must-pass legislation," Lokay said.
Other positive signs for the industry and cannabis stocks, says Lyon, include President Biden’s recent commutation of 75 sentences for individuals serving nonviolent drug offenses in addition to the assumed legalization in several states such as Maryland and Pennsylvania.
What About Republicans And The Drug Czar’s Strategy?
While the SAFE Act may stand a better chance of passing the Senate and reaching Biden’s desk this year, the bill also needs to satisfy the demands of Republicans, who seem to be holding out against large cannabis reforms.
As for Biden’s clemency efforts, we shouldn’t forget that his drug czar’s strategy still aims to lower marijuana consumption. According to the White House’s 2022 National Drug Control Strategy report, the administration is mostly concentrated on reducing harm and addiction treatments. Nevertheless, it also highlights in a survey that cannabis use among high school students was 36.8%, which is much higher than misuse of prescription opioids (14.3%). The report suggests the expansion of programs to stop youth drug use, including marijuana.
Although this may indicate that federal policy concerns about cannabis are still very much alive, no legal adult-use programs allow sale and use by those younger than 21, which means that legalization is in line with these concerns.
However, federal legalization delays seem to be ongoing with Senate Majority Leader Charles Schumer (D-N.Y.) announcing recently he was postponing the filing of a comprehensive marijuana reform proposal from April to sometime before the August recess.
“Decriminalization is so important to this industry,” Bloomberg Intelligence analyst Kenneth Shea highlighted in an interview. “And the can keeps getting kicked down the line.”
Still, Progress Looks Imminent
In conclusion, federal legalization delays definitely impact weed stocks, but on the other hand, reform appears to be imminent. As such, we should not forget that demand for cannabis products and each state's efforts also play important roles in the rise and fall of the cannabis stock market.
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