For investors who love getting a good deal, this is an excellent time to take a fresh look at cannabis stocks.
After an incredible 12-month run higher from March of 2020 to February of 2021, cannabis stocks have entered a bear market – defined as a 20% or more decline from the 52-week high.
The Advisors Shares Pure U.S. Cannabis ETF (MSOS) is down 21% from the 52-week high in mid-February. Take a look at the 6-month chart below – you can see the all-time high from February and the recent decline.
2 Factors Weighing on Cannabis Stocks
I see two key factors driving the recent decline.
Profit-Taking After Huge Gains in the Last 12 Months
Cannabis stocks had an incredible run higher from March of 2020 to February of 2021. For example, U.S. cannabis leader Curaleaf Holdings (CURLF) was up 600% in that time. After a big run higher, it’s normal for shorter-term traders and investors to lock in some profits. That’s what has been happening in the cannabis sector for the last few weeks and that has driven this recent decline.
Gridlock in Washington Creates Uncertainty Over Legalization
When Democrats won the Presidency, the House and the Senate optimism spiked that federal legalization was right around the corner. While federal legalization does still look inevitable, it may take longer than recently expected. That’s because of gridlock in Washington.
For example, the COVID-19 stimulus bill didn’t receive a single vote from Republicans. Even though legalization is gaining more support from Republicans, the lack of cooperation on the COVID-19 bill has made cannabis investors and analysts nervous that federal legalization won’t happen in 2021.
4 Reasons to be Optimistic about Cannabis Stocks
However, this bout of weakness looks temporary. Looking forward, I expect cannabis stocks to rebound and continue climbing higher because of four powerful catalysts on the horizon in 2021.
U.S. Cannabis Sales Are Booming
The U.S. cannabis industry is booming. Early industry leaders are reporting incredible sales growth. For example, Curaleaf recently reported awesome full-year results that included 200% revenue growth from 2019. What other sector is delivering this kind of growth right now? I don’t know of any, particularly in the era of COVID that has hurt so many industries.
7 More U.S. States Could Go Legal in the Next 12 Months
Looking forward, the U.S. cannabis industry should grow even faster. A number of U.S. states are set to legalize in the next 12 months in order to compensate for a loss in COVID-related tax revenue. That list includes New York, Pennsylvania, and Virginia.
Congress Should Pass a Cannabis Bill in 2021
Although federal legalization may take longer than expected, I still see a high probability of major reform in 2021. Multiple cannabis bills are currently in Congress. That includes the SAFE Act and the MORE Act. Both of these bills would usher in significant reform and be major catalysts for industry growth.
The Trend Is Still Higher in Cannabis Stocks
Despite the recent weakness, the trend is still higher in the cannabis sector. I believe the cannabis sector established a long-term bottom in March of 2020 is still in the early stages of a long-term uptrend.
The Big Picture
The cannabis sector just entered a bear market, defined as a 20% decline from the 52-week high.
Despite the recent bout of weakness, I remain optimistic about cannabis stocks because of four powerful catalysts directly on the horizon. I view weakness as temporary and an opportunity for new capital to enter the sector.
About the Author & Cannabis Stock Trades
Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.