Delay of Federal Legalization Affects Stocks

Stephen Andrews
09 Feb 2022

An analysis published by Financial Times shows that cannabis stocks have suffered over the last 12 months. The reason? The prolonged wait to introduce federal legislation and regulate recreational marijuana nationwide pushes investors away. President Joe Biden made a campaign pledge that he would decriminalize marijuana, which led for shares to jump in the period leading to Biden's inauguration a year ago. However, as hopes of imminent decriminalization were shattered, cannabis stocks began to sink, even though sales of cannabis products continued to soar and reach new highs.

According to a recent Financial Times report, since January 2021, the average US-listed cannabis stock has been down by more than a third, compared with 20% for the S&P 500. A downward trend is noticeable on the Canadian index as well, where a 50% drop took place over the same period. 

The diagrams for companies such as Canopy Growth, Cresco Labs, Cronos, Curaleaf, Organigram, Tilray, Truelieve Cannabis all show a downward trend, with share prices going back to autumn 2020 average after a rapid climb triggered by Biden being announced a winner in the US presidential election.

Up until now, 18 states around the US have legalized the adult use of marijuana. In Canada, recreational retail has been legal since 2018. A year ago, the sentiment was that the change in the US political landscape would result in full-scale legalization. Cannabis stocks rose in the weeks before President Biden assumed office at the start of 2021. However, after a year of serving in the Oval Office, the president appears to be out of step with his party efforts on cannabis reform. Decriminalization has still hasn't taken place. 

The Democrat party has pushed a legislation bill that hasn't been met with sufficient support in the Senate. The Safe and Fair Enforcement Banking Act, which aims to normalize access to regular bank services for legal cannabis enterprises, has not been voted either. This continual lack of political will to enact a wider cannabis reform is deemed the reason why stock prices gradually went down over the last 12-month period. 

In the meantime, sales of cannabis are doing pretty well. Financial Times reports that revenues for US-listed companies have grown five-fold since 2019. 

The growth is even more eye-popping when you look further down the line.

"In 2014 the industry did less than $100mn in legal sales in the US; in 2020 that number was $20bn," says Scott Greiper, president of New York-based cannabis investment firm Viridian Capital.

While most Americans have access to legal, medical cannabis goods, the lack of regulation on recreational products at a federal level discourages institutional investors (such as investment firms, funds, and similar large entities) from putting their money in cannabis stocks

Karan Wadhera, a managing partner at Los Angeles-based cannabis investment company Casa Verde, says that lack of institutional investment is "the most important reason globally" why stocks performed poorly throughout 2021, reports Financial Times. 

"These businesses are operating better than they ever have, with more revenue, more growth, and much better performance than they have historically, but you don't have long-term holders who take positions and hold and wait," says Wadhera. 

According to Financial Times, the situation with stock prices has been similar overseas in the UK, with "institutional apathy" again being cited as a major factor of influence. An example is the medical cannabis company Kanabo which bounced 500% when it was first listed in February 2021, however, its share price has dropped by 70% ever since. 

Besides the lack of legalization and decreased interest from prominent investors, experts also cite the rise in inflation as another factor affecting cannabis stocks. However, inflation is something that seems to affect all sectors. 

Other younger sectors, such as the electric vehicle market, have as well seen share prices plummet in 2021. What may comfort investors is that demand for cannabis products or electric vehicles whatsoever will continue to keep a steady pace in the future. The share price downtrend may be temporary, but it just shows how important market security is, especially for relatively new industries. It's something that, at least in the case of cannabis, only decriminalization can bring forward. 

Stephen Andrews