In November, pot stocks soared on both a Joe Biden presidential win and the legalization of recreational marijuana in four more states (Arizona, Montana, New Jersey, and South Dakota). There's been plenty of optimism that there could be significant changes ahead for the cannabis industry, including the decriminalization of marijuana and moving it off its current Schedule I classification with the Drug Enforcement Administration (DEA). 

But time and time again, cannabis investors have gotten their hopes up after marijuana legislation passed in the House of Representatives only for it to end up going nowhere. Even a change in leadership at the White House may not be enough to move the needle. Arguably, one of the biggest obstacles for the cannabis industry is the U.S. Senate -- but power there could soon shift as well.

The exterior of the U.S. Capitol building

Image source: Getty Images.

Runoff elections will dictate which party controls the Senate

In Georgia, two Senate runoff elections are scheduled for today, Jan. 5. All eyes are peeled on the race, given that Republicans currently hold 50 seats while Democrats occupy 48 (if you include the two independents who caucus with them, Bernie Sanders and Angus King). With two seats at stake, a Democratic sweep would give the party an equal share. And if there is a tie in the Senate, the deadlock is broken by the vice president -- a seat that Democrat Kamala Harris will soon hold.

Why does it matter if Democrats gain control?

Democratic control of the Senate is important to the pot industry, because Republicans have historically taken a harder stance on cannabis than Democrats. While multiple marijuana bills have passed the Democrat-controlled House in the past few years, there's been no progress in the Senate. In September 2019, the House passed the Secure and Fair Enforcement (SAFE) Banking Act. The bill was an effort to help the industry easily access banking services and avoid having to hold excessive amounts of cash, which many argue is a security issue. And even that failed to go anywhere in the Senate. 

On Oct. 1, the House also passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, a COVID-19 relief bill that included the SAFE Banking Act. And while it renewed optimism for the cannabis bill, the act hasn't moved since. The Senate did approve the Coronavirus Aid, Relief, and Economic Security (CARES) Act earlier this year, which provided funding to help small businesses -- with the exception of those involved with federally illegal marijuana sales.

Most recently, the House passed the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, one of the most ambitious marijuana bills presented by Congress. It wouldn't legalize pot, but would remove the drug from the Controlled Substances Act. However, drug policy expert John Hudak said he "would give it less than a snowball's chance of passage in the Senate."

In short, there's been little love for marijuana in majority leader Mitch McConnell's Senate. Unless power changes hands, it's unlikely there will be much hope for any meaningful marijuana reform in the near future.

Although a change in control in the Senate doesn't guarantee that any marijuana-friendly bill will pass if it gets there, it certainly improves the odds for marijuana reform to take place over the next few years.

Marijuana reform is an easy way to get investors bullish on the sector

During the month of November, amid all the excitement in the industry about legalization, many top pot stocks soared:

HMMJ Chart

HMMJ data by YCharts

Canopy Growth (NASDAQ:CGC), Aurora CannabisHEXO, and Aphria all soared more than 50% during the month. Even the Horizons Marijuana Life Sciences ETF popped. Even a sliver of hope that marijuana reform will pass can get investors more bullish on the industry. While the outright legalization of marijuana may not be imminent, any reform could be seen as a positive step forward.

Canopy Growth may have the most to gain. In 2019, it struck a deal to acquire multistate operator Acreage Holdings upon federal legalization of marijuana in the U.S. Acreage has a presence in 15 states. The move would give Canopy Growth a strong footprint in the U.S. market. The two companies are planning ahead for the legalized market -- Acreage is launching cannabis-infused beverages in the U.S. market this summer. In addition, Canopy Growth offers a line of Martha Stewart CBD Wellness Gummies, which are made in the U.S. and made from hemp-derived cannabidiol (CBD).

The U.S. is a big part of Canopy Growth's long-term strategy, and the stock could skyrocket in 2021 if there's some heightened optimism for the industry -- and for marijuana bills to finally find their way through the Senate. For all of these reasons, cannabis investors should keep their eyes on Georgia today.