Since President Joe Biden won the White House and voters in five states passed marijuana reforms in November, optimism about the future of the U.S. cannabis industry has been growing. The Horizons Marijuana Life Sciences ETF is up by around 100% since Nov. 3 -- and that's even after it fell a bit in recent weeks.
Many cannabis executives are bullish that legalization in the U.S. could be right around the corner. Among them are the heads of the two companies preparing for the industry's latest mega-merger: Aphria (NASDAQ:APHA) and Tilray (NASDAQ:TLRY). Are they feeling too optimistic, or could the industry's watershed moment be on the not-so-distant horizon?
Will marijuana legalization happen during Biden's presidency?
President Biden isn't exactly eager to legalize marijuana. He does believe that "getting caught for smoking marijuana shouldn't deny you a good-paying job and career, a loan, or ability to rent an apartment." But while decriminalization looks probable, outright legalization wasn't a policy he campaigned on, though it would be a best-case scenario for the cannabis industry.
The one wrinkle, however, is the coronavirus pandemic, which has done serious damage to much of the economy and thrown millions of Americans out of work. Creating new jobs is a major priority for Biden, and the possibility of doing that could give him an incentive to take another look at legalization. According to a report by Leafly, the cannabis industry created at least 77,000 jobs in 2020. There are now 321,000 full-time jobs in the legal pot market -- that's more than the number of EMTs and paramedics in the entire country.
Cannabis executives expect that legalization will take place soon, and opine that it is really just a question of when rather than if. In a recent interview on CNBC, Aphria CEO Irwin Simon said he expects that within two to three years, there will be a "fully legalized" marijuana market in the U.S.
In January, Tilray CEO Brendan Kennedy was even more optimistic during a CNBC interview, saying: "I expect that pressure from the North and the South will ultimately lead the U.S. to implement a federal program here at some point in the next 18 to 24 months." He was referring to marijuana reforms that have been taking place in Mexico and the already-completed legalization in Canada. The results of their reforms could leave the U.S. sandwiched between two legal pot markets.
But theirs aren't even the most bullish of expectations. Canopy Growth CEO David Klein said he anticipates that his company will be operating in the U.S. within a year. He made that statement after Democrats won Georgia's two run-off Senate elections, giving them full (albeit narrow) control of both houses of Congress.
Investors should take these predictions with a grain of salt
It is in a CEO's best interest to get investors excited about their company -- and marijuana legalization would be great news for the companies noted above. Aphria's CEO did place an asterisk on his expectations, stating that "there's a lot of unknown about what will happen in the U.S."
Investors need to remember that these are just expectations, nothing else. There is no guarantee that legalization will happen during Biden's presidency, and the marijuana reforms cannabis executives are hoping for may not match up with reality. Decriminalization, for instance, would be a great step for the industry, but it wouldn't do anything for Canadian-based pot stocks looking to enter the U.S. market. In the meantime, investors considering buying stock in a company need to think about that choice based on the business's merits today, not what may or may not happen years down the road.
Given that 16 states (and D.C.) have legalized marijuana for recreational use and 36 of them now allow its use for medical purposes, it does appear likely that legalization at the federal level is inevitable. But that doesn't mean full recreational legalization will take place in a year or two. It may just be medical marijuana that Congress decides to legalize, or decriminalization may be as far as it is willing to go. And it is also possible that Washington won't pass any cannabis legislation for awhile.
Should you invest in these Canadian pot stocks?
Aphria and Tilray are on track to close their merger in the second quarter. The combined company will have a greater pool of resources and assets, putting it in a stronger position to pursue a large share of the U.S. market -- once it becomes legal for it to do business here. Canopy Growth also has a tentative deal to acquire Acreage Holdings that is ready-to-go once legalization takes place. These companies could all be big players in the U.S. market -- but again, the problem is that there's no clarity about when this market will be open to them.
Unless you think these companies are good investments today, regardless of how long it takes for Congress to pass cannabis legalization, you may be better off waiting to invest. The marijuana industry is full of volatility, and where these stocks will be when legalization arrives is anyone's guess. Don't let the expressed optimism of insiders distort your expectations for the future, because that could set you up for disappointment.