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Why Are Pot Stocks Popping?

By David Jagielski – Oct 17, 2020 at 7:07AM

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Investors are starting to turn bullish on the cannabis industry again.

October has been a good month for the marijuana industry, with the Horizons Marijuana Life Sciences ETF up about 13% so far against the S&P 500's 4% climb. Many pot stocks, including Canopy Growth (CGC -7.01%) and Curaleaf Holdings (CURLF -1.15%), spiked to levels they haven't reached in months. It's not often that there's such widespread bullishness in the industry.

However, pot stocks are generally volatile, so it's important to understand what's gotten investors so excited recently before making an investment decision. Below, I'll take a look at what's behind this latest rally, what it means for investors, and whether now is a good time to buy pot stocks.

Debate sends prices surging

The clear catalyst behind the rising value of cannabis investments this month was the vice presidential debate that took place on Oct. 7. The Horizons ETF jumped 7.3% the following day, from $4.51 to $4.84. And by Oct. 13 it hit a high of $5.05 -- up a total of 12% within a week's time. What got investors' attention amid the debate was that Sen. Kamala Harris, the Democratic vice-presidential nominee, vowed to decriminalize marijuana if people voted her ticket into power next month.

Gavel and cannabis on block on top of U.S. flag.

Image source: Getty Images.

This is not the first time Harris has discussed decriminalizing pot or pledged to do so. However, with the federal election just weeks away and the pledge made on a very public stage, the news had a lot more impact this time around.

What does this mean for investors?

From investors' point of view, this shouldn't mean as much as the recent spike in pot stock prices would suggest. After all, decriminalization still falls well short of the outright legalization of marijuana, which is what the industry desperately wants to see happen. Until federal legalization takes place and the government removes all restrictions for the industry, cannabis companies will still face challenges expanding across the country and Canadian producers like Canopy Growth won't be able to access the U.S. pot market.

Investors may recall that in April 2019, Canopy Growth reached an exciting deal to acquire New York-based cannabis company Acreage Holdings for a value of $3.4 billion (that amount has since been reduced due to falling stock prices). However, the companies can't finalize the deal until marijuana is legal in the U.S., as Canopy is listed on both the New York Stock Exchange and the Toronto Stock Exchange (TSX). In 2018, Ontario-based cannabis producer Aphria sold its U.S. cannabis holdings after the TSX issued warnings to companies involved in the U.S. pot industry, telling them they were non-compliant with the exchange's rules.

Decriminalizing pot could be a step in the right direction for the industry. For one thing, it will likely mean that the government no longer classifies pot as a Schedule 1 substance. That would open the doors for more research in the industry and for the big banks to do business with the cannabis companies. Many companies in the industry operate on a cash basis because it's difficult to obtain banking services. And while the SAFE Banking Act -- which would address the banking shortfalls in the cannabis industry -- passed the House over a year ago, the bill has failed to become law. Lawmakers have included it in COVID-19 relief packages, but that still hasn't been enough to get the bill passed. 

The bottom line is that while decriminalizing pot would be an important step forward for the industry, it would still fall short of what marijuana companies and investors are after. Until the government removes all the barriers for cannabis, the industry will still struggle to live up to its full potential.

Is now a time to invest in pot stocks?

Although you probably shouldn't invest in the cannabis industry solely because of what was said in a debate, there is a bigger reason that now could be a good time to consider buying pot stocks: Five states could legalize marijuana in some form next month. Voters in Montana, Arizona, New Jersey, and South Dakota will be deciding on whether to allow recreational pot in their respective states. South Dakota is deciding on both medical and recreational marijuana. Meanwhile, Missouri voters will determine whether their state should permit marijuana for medicinal use.

If these votes lead to more cannabis markets for marijuana producers to tap into, that will undoubtedly bring about more growth, especially for a multistate operator like Curaleaf, which has a presence in 23 states across the country. The company has been aggressive in its pursuit of expansion, announcing Oct. 14 that it would open two new dispensaries in Florida, bringing its total count to 95 locations across the country.

Curaleaf would likely relish the opportunity to tap into a hot new market. Illinois is a great example -- the state only began allowing recreational pot in 2020 and sales have been scorching hot ever since. From just $39 million in sales in January, the state's numbers have continued to rise, hitting more than $67 million in September. Adding another large state into the mix -- especially a populous one like New Jersey  -- would attract lots of attention from large cannabis companies like Curaleaf and likely lead to more expansion. On Aug. 17, the company released its second-quarter results for the period ending June 30, showing that sales of $117.5 million grew at a rate of 142% from the prior-year period.

There could be some great news for the cannabis industry next month when voters go to the polls. And that's why investing in a pot stock like Curaleaf could be a great move to make, as there could soon be even more growth opportunities ahead for the company.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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