Happy days are here again for marijuana stocks. All of the top cannabis-focused exchange-traded funds (ETFs) are up more than 20% in November. Some of these ETFs' holdings have even soared a lot more than that.
This kind of momentum generates excitement, which, in turn, leads to even more momentum. There definitely are reasons to be more optimistic about the prospects for marijuana stocks. However, there's a big mistake that some cannabis investors are making right now.
Image source: Getty Images.
Getting the cart before the horse
Investors are understandably excited about the positive news for the U.S. cannabis industry stemming from the election results. It's not much of an exaggeration to say that the biggest winner on Election Day was marijuana.
Arguably the biggest story for the cannabis industry from the U.S. elections was that voters in four states approved recreational-marijuana legalization. While two of these new markets -- Montana and South Dakota -- will be small, the other two markets in Arizona and New Jersey present tremendous new opportunities for cannabis companies.
In addition, South Dakota and Mississippi voters approved the legalization of medical marijuana. Again, these don't represent huge new markets. The votes in these states, however, underscore the popular support for medical cannabis legalization across the U.S.
The big mistake that some investors are making, though, is the assumption that the U.S. is clearly on the way to changing federal laws related to cannabis. Yes, President-elect Biden could be more supportive of revising federal laws about medical cannabis and recognizing the authority of individual states to enforce their own recreational marijuana laws. But Biden isn't a diehard fan of cannabis reform.
More importantly, the primary obstacle to changing federal marijuana laws in the past is getting the Senate to even consider bills. As long as Sen. Mitch McConnell (R-Ky.) remains Senate majority leader, it's likely that he'll keep blocking cannabis legislation.
As it stands right now, the GOP will hold 50 Senate seats next year. Two run-off elections in Georgia will determine which party has a majority in the Senate. There's a pretty good chance that Republicans will win at least one of those races and hang onto control of the Senate. That would mean Sen. McConnell will be able to continue preventing cannabis bills from coming to the Senate floor for a vote.
Irrational exuberance
How can we know that some investors are getting too excited about the prospects for marijuana legalization in the U.S.? Take a look at how several of the top Canadian pot stocks have soared in recent days.
Aurora Cannabis skyrocketed after Election Day, although it has given up some of its gains. Canopy Growth, Cronos Group, and Tilray also vaulted much higher.
None of these stocks directly benefit from the new states legalizing recreational and/or medical marijuana. However, they could be big winners if the U.S. legalizes marijuana at the federal level. Such a change would clear the way for Canadian companies to enter the U.S. cannabis market, while still listing their shares on major U.S. stock exchanges.
The key point, though, is that the prospects of this scenario happening aren't nearly as great as some investors appear to think. As a result, the big gains for Canadian pot stocks only reflect irrational exuberance -- at least for now.
No mistake about it
On the other hand, it makes perfect sense why investors are bullish about many U.S.-based marijuana stocks. For example, shares of Cresco Labs (CRLBF 2.52%) and Green Thumb Industries (GTBIF 1.11%) have delivered solid gains over the last couple of weeks for good reason.
The votes in Arizona and New Jersey, in particular, could open the door to tremendous growth opportunities for these companies and their peers. Green Thumb Industries CEO Ben Kovler referred to one of these opportunities in his comments about the company's Q3 results, stating, "New Jersey is great news for us as we think that legal market has the potential to mirror Illinois -- a single state, multibillion dollar legal cannabis market about to be born."
Some investors are jumping the gun with buying Canadian pot stocks based on the U.S. election results. But make no mistake about it: Those results are good news for several U.S. cannabis companies.
