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 75% 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).
I reference a Canadian cannabis ETF 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 60% 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)
- Cresco Labs (OTC: CRLBF)
On the Canadian side, the top five holdings of the Horizons Marijuana Life Sciences Index ETF, which make up over 60% of the fund, are:
- Cronos Group (NASDAQ: CRON)
- Innovative Industrial Properties (NYSE: IIPR)
- Jazz Pharmaceuticals (NASDAQ: JAZZ)
- Scotts Miracle-Gro (NYSE: SMG)
- 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 24 states in the US, as well as in Washington DC and Guam, as of Q2 2024. It will be on the ballot in Florida in 2024.
Medical cannabis use is legal in 38 states.
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.
In January 2024, the US Food and Drug Administration (FDA) released documents supporting the reclassification of cannabis from Schedule I to Schedule III, with the New York Times reporting that:
Marijuana is neither as risky nor as prone to abuse as other tightly controlled substances and has potential medical benefits, and therefore should be removed from the nation’s most restrictive category of drugs, federal scientists have concluded.
The recommendations are contained in a 250-page scientific review provided to Matthew Zorn, a Texas lawyer who sued Health and Human Services officials for its release and published it online on Friday night. An H.H.S. official confirmed the authenticity of the document.
Since 1970, marijuana has been considered a so-called Schedule I drug, a category that also includes heroin. Schedule I drugs have no medical use and a high potential for abuse, and they carry severe criminal penalties under federal trafficking laws.
The documents show that scientists at the Food and Drug Administration and the National Institute on Drug Abuse have recommended that the Drug Enforcement Administration make marijuana a Schedule III drug, alongside the likes of ketamine and testosterone, which are available by prescription.
That’s important because the last time the DEA rejected the rescheduling of cannabis in 2016, it cited health officials’ position at the time as its justification. Now that Federal health agencies have changed their stance, perhaps the DEA will as well. Its decision is expected within months.
President Biden called for this re-examination in 2022, and had pardoned individuals with simple marijuana possession convictions as recently as two months ago. So his opinion has softened over his presidency and could become a rallying point in the election.
And while it’s unclear what the DEA’s ultimate decision will be, and what the timeline for it is, one thing is less hazy right now: cannabis stocks are trying to get bullish.
Multiple listed cannabis companies hit 52-week highs in early 2024 amid expectations of policy change in the US and potential beneficial excise tax changes in Canada.
Rumors at the time were swirling about the possibility of an interstate commerce agreement that would allow production from western states like California, Oregon, and Washington to be exported to other states. Where I live, in Washington, Governor Inslee has already signed a bill that would allow interstate cannabis commerce with the federal government’s blessing.
A group of cannabis companies, led by multi-state operator Verano Holdings, is suing the Justice Department to block the enforcement of cannabis prohibition in states where it’s legal. The Justice Department is seeking to have the case dismissed, showing they aren’t down with dope quite yet. It remains to be seen if it will become an election-year issue.
At the state level, things are progressing as well. In Florida, cannabis legalization will be on the ballot this fall. It would require 60% approval to pass, and recent polls show support right near that level. In Pennsylvania, House Appropriations Committee Chairman Jordan Harris is calling for the legalization of cannabis consumption as well as the exportation of it to other states. Pennsylvania Governor Josh Shapiro included taxes from legalization in his recently released budget.
All this likely hinges on the Drug Enforcement Administration’s (DEA) ongoing review of the rescheduling of cannabis under the Controlled Substances Act. President Biden did mention the ongoing review in his State of the Union speech, indicating positive sentiment. But the timing is still only known to the DEA and DOJ. I’d want to be positioned in the sector when it happens.
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 cost $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 or policy change in the US before cannabis stocks can get more bullish.
Advice for Investing in Cannabis
There's no harm in putting a small percentage of your portfolio in one of the cannabis stock ETFs like HMMJ or MSOS.
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.
And I also give specific cannabis recommendations in two of my premium research services.
Foundational Profits covers cannabis ETFs. And in Hodge Family Office, we will speculate on smaller individual cannabis names.