Cannabis stocks have hit the skids in recent months as growth in the Canadian market hasn’t lived up to expectations. However, the biggest bullish long-term catalyst for cannabis stocks isn’t in Canada. It’s U.S. federal legalization of cannabis.
Marijuana stocks ripped higher in the past week after the House Judiciary Committee passed the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act. The MORE Act is basically the holy grail for cannabis investors and would legalize recreational cannabis on a national level. The MORE Act would also expunge previous marijuana-related convictions.
The bad news for cannabis stocks is that the MORE Act has very little chance of becoming a law. The good news for cannabis stocks is that marijuana legalization will likely be a hot topic during the 2020 U.S. election season.
MORE Act Outlook
The encouraging part of the MORE Act passage by the Judiciary Committee is that the vote wasn’t perfectly split along party lines. The 24-10 vote in favor of the bill included two Republican votes.
The Republican support likely comes due to the growing majority of U.S. voters that support legalization. As recently as this summer, polls were showing 55% of Americans in favor of marijuana legalization. However, a brand new Pew Research Center poll found that number has risen to 66%. The same poll found 78% of Democrats favor federal legalization, while only 55% of Republicans do. Still, 55% is a majority of Republican voters.
Given the rising support for legalization, the Democrats seem to want to make the issue central to the 2020 campaign. In addition to the MORE Act, the Strengthening the Tenth Amendment Through Entrusting States Act of 2019 (STATES Act) would essentially remove the federal government from cannabis regulation. The STATES Act is also currently in the House.
Cantor Fitzgerald analyst Pablo Zuanic says the STATES Act may be the biggest reason Republicans don’t support the MORE Act in the Senate. He says industry experts see the STATES Act as a less aggressive step toward legalization, which should appeal more to Republicans.
“It would seem there would be more support from Republicans for the STATES Act being currently proposed in the House, and perhaps as a compromise, MORE would be shelved while STATES would be approved,” Zuanic says.
The STATES Act wouldn’t legalize marijuana federally. But it would free up banks to lend to cannabis companies. It would also remove much of the risk associated with operating a cannabis business in states where it is legal.
Election Season Huge For Cannabis Stocks
Shareholders of cannabis stocks will get a major U.S. cannabis litmus test in 2020. Ironically, the political dynamic of the issue may hinge more on the Democrats than the Republicans.
Democratic front-runners Elizabeth Warren and Joe Biden seem to be on opposite sides of the marijuana fence. Warren is in favor of legalization and is a co-author of the STATES Act. Biden recently took heat from the marijuana legalization crowd by saying there has “not nearly been enough evidence” about “whether or not it is a gateway drug.”
Zuanic says conventional wisdom would suggest President Trump would likely position himself more in-line with his conservative base when it comes to marijuana legalization. But Trump is far from conventional. In addition, if Biden is the nominee, Zuanic says Trump could see Biden’s position on cannabis as a potential weakness.
“If Joe Biden won the nomination for his party, perhaps the Republican candidate would takethe opposite view and favor legalization (it could shift a few swing voters, no?),” Zuanic says.
Bottom Line For Cannabis Stocks
I believe the 2020 election season will be bullish for cannabis stocks. But I believe investors buying MORE Act news or betting on federal U.S. legalization within the next two years are way too optimistic.
The most realistic outcome that shareholders of cannabis stocks can hope for ahead of the 2020 election is passage of the STATES Act. Given few Republican Senators have come out in support of the bill, even that outcome is far from certain.
No matter what, serious cannabis legalization bills are being proposed. That public debate is good news for cannabis stocks. But investors should keep their expectations in check for the near-term.
In the past week, cannabis stocks like Canopy Growth Corp (NYSE:CGC), Acreage Holdings (OTCMKTS:ACRGF) and HEXO (NYSE:HEXO) have rallied hard. I see no problem in buying these cannabis stocks as part of a basket of long-term marijuana investments. Just don’t assume the outlook for U.S. legalization has changed in any meaningful way following the MORE Act news.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.