Categories: Stock Market
Topics: Alternative Investments

Cannabis Stocks: Turnaround or More Letdown?

Cannabis stocks have largely been a losing proposition after the heady days that followed the full legalization in Canada back in 2018.

Even with another spike in the post-COVID euphoria that saw most risky assets rise dramatically in price — like crypto and meme stocks — the cannabis sector has lost over 80% of its value by market capitalization since peaking in summer of 2018.

You can see that below in the chart of the Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ) and the Horizons US Marijuana Index ETF (TSX: HMUS).

I reference Canadian cannabis ETFs first because it was legalized federally there first and because the stocks have been trading longer on major Canadian stock exchanges.

Cannabis stock ETFs didn’t debut until later in the United States, likely because of the fractured legal framework where cannabis can be legal at the state level but is still illegal federally.

As of 2023, cannabis companies can only list on major US exchanges like the NYSE and NASDAQ if they operate exclusively outside the country. If a cannabis stock operates in the US it has to list over-the-counter (OTC).

Funds that own US cannabis operators, however, have been able to list on major exchanges. The most well known and liquid, probably because it was the first, is the AdvisorShares Pure US Cannabis ETF (NYSE: MSOS). It listed in 2020 and is down more than 80% from its peak in early 2021.

Top Five Cannabis Stock Holdings

An easy way to get a look at the top cannabis stocks is to look at what those cannabis ETFs are holding.

The top five holdings of the AdvisorShares Pure US Cannabis ETF, which together make up more than 75% of the fund, are:

• Green Thumb Industries (OTC: GTBIF)
• Curaleaf Holdings (OTC: CURLF)
• Trulieve Cannabis (OTC: TCNNF)
• Verano Holdings (OTC: VRNOF)
• Terrascend Corp. (OTC: TSNDF)

On the Canadian side, the top five holdings of the Horizons Marijuana Life Sciences Index ETF, which make up two thirds of the fund, are:

• Jazz Pharmaceuticals (NASDAQ: JAZZ)
• Scotts Miracle-Gro (NYSE: SMG)
• Innovative Industrial Properties (NYSE: IIPR)
• Cronos Group (NASDAQ: CRON)
• Tilray Brands (NASDAQ: TLRY)

While there are hundreds of cannabis stocks in the US and Canada, the ten outlined above would be a great starting point for most investors interested in building their own cannabis stock portfolio.

Legal Status of Cannabis at the State and Federal Level

Cannabis is currently legal for recreational use in 23 states in the US, as well as in Washington DC and Guam, as of October 2023. A ballot measure in Oklahoma to make cannabis legal there failed in March 2023.

While President Biden has said he will issue pardons to those convicted federally of marijuana possession, it remains illegal at the federal level, and the efforts to pass meaningful legislation in Congress have routinely passed the House but failed in the Senate.

The entire cannabis group surged in late August and early September 2023 amid a recommendation by the US Department of Health and Human Services to the Drug Enforcement Agency (DEA) to reclassify the drug as lower risk. The recommendation is to move it to “Schedule III” from its current “Schedule I” status, which would significantly reduce the current financial and tax burdens on the sector. The DEA still needs to approve. So we’ll see if this is another regulatory letdown.

Even if cannabis is rescheduled in the US, it will likely be another few years until the rules are finalized and implemented. Investors have realized that, and the Advisorshares Pure US Cannabis (NYSE: MSOS) has already given back a third of its gains to trade at US$6.82, despite the Senate advancing a cannabis banking bill in late September. Here’s Reuters from September 27:

A U.S. Senate committee on Wednesday voted to advance a marijuana banking bill, raising hopes for the cash-dependent cannabis sector to get access to regular banking services. The Secure and Fair Enforcement Regulation Banking Act (SAFER) bill, introduced by a bipartisan group of senators last week, will now move to the Senate floor.

The bill, which has been around in multiple forms since 2015 and has already been passed by the House seven times, will now move to the Senate floor for the first time. There is no set date for that yet. And even if it passes an equally divided Senate, this version of the bill faces an uphill battle in a fractured House.

What’s more, Biden isn’t particularly pro-cannabis. And neither is Donald Trump, who said this spring that if he’s re-elected, “We're going to be asking everyone who sells drugs, gets caught selling drugs, to receive the death penalty for their heinous acts.”

Cannabis Stock Performance & Outlook

Cannabis stocks trade as a group, moving in lock-step to positive and negative news on the legislative and pricing front.

As mentioned above, the news has mostly been negative for the past few years with no movement on US federal cannabis legislation and a decline in cannabis prices.

According to Statistics Canada, a gram of legal cannabis costs $10.29 on average in 2019, the year after recreational cannabis was legalized in Canada. Legal weed prices have fallen dramatically in recent years, with the Ontario Cannabis Store advertising several brands of flower for between $3.50 and $4.50 per gram in recent months.

This makes investing in cannabis stocks a game of timing. There will need to be meaningful legislation in the US before cannabis stocks can get bullish again.

Advice for Investing in Cannabis

My two cents is that as of now, most investors should probably stay away from cannabis stocks. However, if you're determined to get in on the game, there's no harm in putting a small percentage of your portfolio in one of the cannabis stock ETFs like HMMJ or HMUS.

The cannabis ETFs are the safest way to invest in the sector, and you'll still get the boost when good news on the cannabis front does come, without having to pick between the hundreds of individual stocks.

For those more adventurous investors willing to take on the risk of investing in individual stocks, the several cannabis ETF holdings listed above are a great place to start.

Nick Hodge
Publisher, Daily Profit Cycle