Is This a Good Time to Buy Cannabis Stocks?

When the Democrats swept the U.S. elections in November, cannabis investors were excited over the potential for major cannabis reform. Today, 90 days into the Biden administration, we have a much better idea of what to expect.

While it looks like reforms may fall short of the holy grail of ‘federal legalization,’ I see a high probability of game-changing cannabis reform in 2021.

The latest evidence?

On Tuesday, the U.S. House of Representatives passed a cannabis banking bill called the Safe Act. Here are some more details from Marijuana Business Daily.

The U.S. House of Representatives passed cannabis banking reform by a strong bipartisan vote of 321-101 on Monday, the first major piece of marijuana legislation to be approved by the new Democratic-controlled Congress.

More than half of the Republicans who voted supported the bill. All Democrats who voted approved the measure.

The measure, known as the SAFE Banking Act, would enable banks and other financial institutions to serve state-legal marijuana businesses without fear of federal punishment.

The House passed a similar cannabis banking reform bill by a 321-103 bipartisan vote in fall 2019 in the previous legislative cycle.

But the legislation stalled in the Senate – which was controlled by Republicans at the time – so the measure needed to start from scratch in the new, two-year legislative cycle that began in January.

What Happens to The Safe Act Now?

While this approval from the House is a step in the right direction, it looks like the bill is about to hit a wall.

Senator (D-NY) Chuck Schumer says the bill won’t make it to the Senate because it lacks support from Democrats who want to pursue a larger, more comprehensive bill. This division among Democrats highlights a key challenge for lawmakers – pursue legalization bit by bit or through sweeping legislation that is harder to pass but more comprehensive?

Despite the short-term differences on how to legalize – the stage is set for significant reform in 2021. Here is how I expect it to play out.

I expect legislators to pursue a comprehensive cannabis bill in 2021 that would include federal legalization. In fact, Schumer has been working on an extensive cannabis bill since March with Senate Finance Committee Chairman Ron Wyden (D-OR) and Sen. Cory Booker (D-NJ). They recently said it will soon be introduced to the floor.

Ultimately, I don’t expect this bill to pass because federal legalization is still a bridge too far. This would lead to a compromise situation, that would still include game-changing cannabis reform. I see a high probability that would include:

  • federal decriminalization
  • rescheduling cannabis as nontoxic
  • updating banking and tax laws
  • giving states more power to legalize

Any one of these reforms would be a huge win for the U.S. cannabis industry. Getting two or more would be a game-changer and likely usher in tens of billions in new investments.

Is This a Good Time to Buy Cannabis Stocks?

For investors who like getting a good deal, this is a good time to take a fresh look at cannabis stocks. While the U.S. cannabis industry is on the verge of a powerful catalyst, cannabis stocks have fallen into a bear market.

The Advisor Shares Pure Cannabis ETF (MSOS) is down 30% from the 52-week high.

6-Month Chart The Advisor Shares Pure Cannabis ETF (MSOS)

The reason the cannabis sector has fallen in the last two months is simple. Cannabis stocks saw an enormous rally in 2020 and after a big rally, it’s normal for shorter-term traders and investors to take some profit off the table. This leads to a small pullback and consolidation in a higher range. After that, stocks usually stabilize, and then the stage is set for a new rally.

This is what I expect to happen here. This looks like a short-term pullback, and after the sector stabilizes, I expect the long-term, uptrend to continue.

The Big Picture

Although ‘federal legalization’ is a long shot, I see a high probability of major cannabis reform in 2021. That includes federal decriminalization, rescheduling, updating banking laws, and giving states more power to control local cannabis markets. I view any of these potential reforms as a powerful catalyst for cannabis stocks.

This looks like a great time to take a fresh look at cannabis stocks. The sector is trading deep into a bear market with a string of potential legislative catalysts directly on the horizon.

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.