2019 was rough for cannabis stocks -- and the investors who held them -- due to a number of factors.
The bubble that grew ahead of Canada's legalization of marijuana in October 2018 burst this year. Investors grew less willing to overlook the wide losses that many companies in the industry are experiencing, and an oversupply of marijuana led to falling prices. Meanwhile, there has been little progress toward legalization at the federal level in the U.S., and the industry remains highly fragmented, meaning there will likely be more losers than winners.
Many of the best-known pot stocks, including Canopy Growth (NYSE:CGC), Aurora Cannabis, Tilray, and Cronos Group, as well as the ETFMG Alternative Harvest ETF, fell sharply this year.
However, the momentum could shift in 2020 as the U.S. presidential election could generate pressure in Washington for legalization.
The impact of an election
It's no secret that conditions in the marijuana industry are politically driven. After all, without legal medical marijuana or recreational pot in Canada, cannabis stocks wouldn't exist, and the Canadian marijuana industry would be much smaller if recreational weed was still illegal north of the border. In the U.S., cannabis-derivative stocks like New Age Beverages popped when the 2018 farm bill was passed, legalizing hemp.
According to the Pew Research Center, two-thirds of Americans support legalizing marijuana for medical use, as do a majority of voters in both political parties -- 55% of Republicans and 78% of Democrats. And 59% of those polled said they favor legalizing recreational marijuana.
In other words, the public support is there to legalize recreational pot nationwide. Today, recreational weed is legal in 10 states, with Illinois set to legalize it in 2020, plus the District of Columbia. Only one state in recent years, Arizona, has voted against allowing marijuana for personal consumption, by a slim margin of 2.6 percentage points. When the issue has come up on the ballot, voters have almost always chosen to legalize.
With a Republican in the White House for the last three years, the issue has stalled at the federal level, but nearly all the 2020 Democratic candidates have expressed support for legal marijuana. Former Vice President Joe Biden, something of an outlier, said he only wants to decriminalize it.
Though it's likely to take more than just a pot-friendly president to achieve federal legalization, any visible progress toward that end should energize pot stocks, as the U.S. market is nearly 10 times the size of Canada's. Investors should also remember that political shifts can happen fairly quickly. Gay marriage went from being illegal everywhere in the U.S. to fully legal in a little more than 10 years. After a number of states allowed it, the Supreme Court made it legal in a 5-4 decision in 2015. A similar process could play out in this case.
Which pot stocks would win if the U.S. legalized marijuana?
While Canadian pot stocks have captured the bulk of investors' attention so far, a different set of stocks could benefit if weed becomes legal at the federal level in the U.S.
Dispensary operators including Green Thumb Industries (OTC:GTBIF) and Curaleaf Holdings (OTC:CURLF) -- which own dozens of locations in both recreational and medical states -- could have an edge. These chains are already building their brands with consumers nationally thanks to marijuana tourism -- many people from states where pot isn't legal have encountered them during visits to states where it is.
Elsewhere, Acreage Holdings (OTC:ACRGF) also presents an appealing opportunity for investors. It's one of the biggest U.S. growers, thanks to a slew of acquisitions, and the company already has a sale agreement in place, pending U.S. legalization: Canopy Growth agreed to acquire it for $3.4 billion when and if that day comes. Given Acreage's current market value of just $517 million, that acquisition price represents a premium of more than 500% That, in turn, also makes Canopy and its own partner Constellation Brands, the distributor of Corona, potential winners on legalization. Canopy is already Canada's biggest pot company and can capitalize on Constellation's own marketing, distribution, and beverage expertise as derivatives continue to be a valuable slice of the marijuana market.
U.S. pot companies generally trade at much cheaper valuations than their Canadian peers, giving them greater upside potential.
Marijuana legalization has received little attention thus far in the presidential campaign, but that doesn't mean the issue has been forgotten. Considering that the younger generations in the U.S. overwhelmingly support it, the question around legalization appears to be more a matter of when it will occur rather than if.
When the general election campaign heats up, keep your eye on the poll numbers. If a pot-friendly candidate is leading, marijuana stocks, especially those with U.S. exposure, should get a strong boost.