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.
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 2.41%). 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):
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.
