Cannabis stocks continue to struggle in 2021. Today I am going to explain why this is happening and share my forecast on what to expect for the rest of the year.
Cannabis stocks were red hot in early 2021.
The Advisor Shares US Cannabis Stock ETF (MSOS) was up as much as 48% on the year in early February, hitting a new all-time high. However, cannabis stocks have been falling ever since and MSOS is down 39% from the 52-week high. Take a look at the 2021 chart below.
Why Are Cannabis Stocks Struggling?
When the democrats took the presidency and both chambers of congress in the November, 2020 U.S. presidential election, it triggered a big rally in cannabis stocks because investors were anticipating major cannabis reform. That makes sense – many democrats were vocal about their desire to legalize or update regulations.
Today, ten months later, the democrats haven’t done much to advance legalization.
Senate Majority Leader Chuck Schumer introduced a draft bill for federal legalization called the Cannabis Administration and Opportunity Act in early July that included a 25% federal tax on adult cannabis sales and was basically dead on arrival.
In the meantime, democrat New Jersey senator Corey Booker has vowed to fight against any cannabis legislation that falls short of full federal legalization. That includes the highly popular bill with bipartisan support called The Secure and Fair Enforcement (SAFE) Banking Act. This bill would be a huge win for the U.S. cannabis industry by eliminating banking restrictions. But while it has passed the senate it still hasn’t passed the house where democrats have a smaller majority.
Outside of these two bills, there has been very little movement on federal or piecemeal legalization and many investors became impatient with the pace of progress and left the sector.
Bloomberg recently published a report on the decline in weed stocks.
What Should We Expect in the Last 4 Months of 2021?
Despite the recent weakness, I remain optimistic on cannabis stocks. The cannabis sector has a history of extreme volatility and these periods of weakness have historically led to huge rallies. I also see four powerful catalysts that could easily jolt cannabis stocks back into a big rally.
U.S. cannabis sales are booming: The recent second-quarter earnings season showed that U.S. cannabis sales are on fire. Here are some of the best results.
- Green Thumb Industries (GTBIF) revenue increased 14.1% sequentially and 85.4% year-over-year to $221.9 million.
- Trulieve (TCNNF) revenue of $215.1 million, a sequential increase of approximately $21 million.
- Columbia Care (CCHWF) revenue jumped 232% from last year.
These impressive results demonstrate the the U.S. cannabis industry is expending rapidly and that should be a strong tailwind for cannabis stocks.
Flurry of states going legal: 2021 has been a banner year for more U.S. states going legal. Four states have already legalized in 2021, including New York, New Mexico, Connecticut and Virginia. Meanwhile legislation is pending in Pennsylvania and Rhode Island. With more states going legal, industry sales should continue to accelerate for many years.
We still expect major cannabis reform in 2021: Although federal legalization looks unlikely in 2021, we still see a high probability of major cannabis reform happening this year. We see that happening with The Secure and Fair Enforcement (SAFE) Banking Act, a bill that would fix some of the cannabis industry’s biggest financial problems. The SAFE Act isn’t long-shot legislation.
This bill has already made serious progress in Congress. The SAFE Act was introduced by Colorado Democrat Ed Perlmutter back in 2019. The SAFE Act has passed in the Democrat-controlled House four times, most recently in April of 2021. Here is a link to a report I wrote for Cannabis Stock Trades with more details on the SAFE Act.
Cannabis stocks are on sale: After the recent decline, cannabis stocks are once again on sale. The Advisor Shares U.S. Cannabis ETF is down 39% from the 52-week high and these lower prices should begin to attract bargain hunters sooner than later.
The Big Picture
Cannabis stocks have been stuck in a nasty bear market for the last seven months, with the U.S. cannabis sector down 39% from the 52-week high.
Despite the weakness, the U.S. cannabis industry is booming and I still expect a strong finish to the year in the next four months.
My plan is to stay patient, continue holding my current cannabis stocks, and also be looking to add more shares when these stocks are down.
I’ll be back with another update next week – have a great day!
Disclaimer: This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading.
Author Michael Vodicka owns shares of Green Thumb Industries (GTBIF) and Trulieve Cannabis Corp (TCNNF).