Please ensure Javascript is enabled for purposes of website accessibility

This Surprising Development Suggests Cannabis Legalization Under Biden May Be a Pipe Dream

By David Jagielski - Mar 30, 2021 at 7:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Cannabis investors have been jumping the gun since the new president was elected in November.

When U.S. President Joe Biden won the election in November 2020, it lit a fuse under the marijuana industry as optimism grew that significant reform could be on the way. Odds are, if you invested in any pot stock after election day, you would be sitting on a nice profit right now. The Horizons Marijuana Life Sciences ETF has doubled in value during that period while the S&P 500 has risen by a more modest 20% in value.

But are investors getting too far ahead of themselves? The Republicans may not be in power anymore but that doesn't mean that legalization will take place anytime soon. And based on some recent developments, there is even more reason to scale back those expectations.

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

Image source: Getty Images.

White House staffers disciplined or fired due to past marijuana use

Last week, the White House confirmed that it let go of five staffers as a result of marijuana use. But a report from the Daily Beast suggests that even more people were disciplined, with some having to work remotely. Press secretary Jen Psaki said other factors also played a role in the decisions and noted that marijuana "is still illegal federally." There's no denying that it is illegal but on the president's very own website, joebiden.com, it states that "getting caught for smoking marijuana shouldn't deny you a good-paying job and career, a loan, or ability to rent an apartment." Although Psaki states "rules were actually far more stringent" under Obama's administration (which she served under) than they are now, these decisions are still in contrast with what the industry was expecting from the current administration. Vice President Kamala Harris said in an October 2020 debate that under Biden, the federal government would decriminalize marijuana.

Now, just because the White House let go of staff that smoked pot in the past doesn't mean marijuana reform won't happen. But the fact that there are still rules in place relating to marijuana and Psaki alluding to the prohibition of pot still being an obstacle suggests that cannabis investors shouldn't expect a smooth ride for the industry under Biden. Sure, you can say the new president has only been on the job for a couple of months now, but on day one he signed 17 executive orders -- and not a single one of them was related to marijuana.

What does this mean for cannabis investors?

If you hold cannabis stocks in your portfolio, now might be a good time to take a second look and see whether their valuations are inflated due to the hype surrounding the election. One stock that I would definitely drop in a hurry is Canopy Growth (CGC 2.79%). Its shares have soared more than 70% since the election. While the CEO's extreme bullishness that the company will be operating in the U.S. within the next year likely helped the stock ascend in value, it also brings with it some lofty expectations.

Canopy Growth is one of the companies that will benefit the most from marijuana legalization as it has a deal in place to acquire Acreage Holdings when that happens (or earlier, if the exchanges permit it). It also has a big investor in Constellation Brands, which owns a 38.6% stake in its business.

Leveraging both of those companies, Canopy Growth could take off when legalization happens. It's an exciting prospect and sure to get investors excited -- except there's one really big problem: Biden never promised that legalization will happen, and neither did Harris. Decriminalization is as far as anyone has gone and many investors are likely getting ahead of themselves. Until legalization takes place, the company won't be able to sell anything but hemp in the U.S. (which is legal federally).

The danger is that the cannabis industry could again be due for a correction as a result of this recent hype. Investors only need to look back at the year after Canada legalized marijuana to see what can happen when reality doesn't mesh with forecasts and expectations. Here's what some of the top pot stocks did in the 12 months following legalization (which took place Oct. 17, 2018):

^SPX Chart
Data by YCharts.

Even a stock like Aphria, which looks like a much safer buy today, had an abysmal performance as legalization stumbled out of the gate. Not enough stores were open, and supply issues caused many problems for the industry. 

But it wasn't just the government's fault, as those pie-in-the-sky forecasts proved to be a joke. Canopy Growth's former CEO Bruce Linton previously forecasted that in 2020 his company would generate one billion Canadian dollars in revenue. Today, the company is nowhere near that mark, reporting just over half of that amount (CA$506 million) over the past four quarters. HEXO also once forecasted it would generate CA$400 million in annual revenue for its 2020 fiscal year. It quickly withdrew that guidance and over the past four quarters, its sales sit at just CA$112 million.

What politicians promise and what companies and CEOs forecast should be taken with a grain of salt, especially when it relates to the cannabis industry. Until marijuana reform actually happens, investors shouldn't assume that it will. Doing so could set you up for some big losses in your portfolio.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$5.89 (2.79%) $0.16
Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
STZ
$250.95 (0.61%) $1.53
Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$3.09 (4.75%) $0.14
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
HMLSF
$3.55 (2.58%) $0.09
HEXO Stock Quote
HEXO
HEXO
$0.33 (3.11%) $0.01
Tilray Stock Quote
Tilray
TLRY
Aphria Stock Quote
Aphria
APHA
Acreage Holdings, Inc. Stock Quote
Acreage Holdings, Inc.
ACRGF
Acreage Holdings, Inc. Stock Quote
Acreage Holdings, Inc.
ACRH.F
$1.05 (2.74%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
338%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.