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This Upcoming Catalyst Could Send Marijuana Stocks Soaring

By David Jagielski - Updated Apr 27, 2021 at 10:18AM

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Will it be déjà vu for investors, or is marijuana reform really on its way?

Here we go again. The Secure and Fair Enforcement (SAFE) banking bill passed the House earlier this month. If that sounds familiar, it's because it passed the House in 2019, only to end up going nowhere in the Senate. Democrats also included it as part of a coronavirus relief bill last year, only for it to eventually get stripped out.

But this time, things are different. Unlike in previous years when there was stiff opposition in the Republican-controlled Senate, Democrats now have control of Congress. There is a far greater likelihood that the bill will not only get some attention in the Senate, but that it will pass. Here is why the bill matters and why it could send pot stocks to new heights.

Marijuana leaf over top of green traffic light.

Image source: Getty Images.

It will address some major problems for the industry

The SAFE banking bill would make it easier for banks to conduct business with cannabis companies. Many large financial institutions are wary of offering services to marijuana businesses because of the federal prohibition of pot, which can make it difficult to simply obtain a bank account. That doesn't mean no one offers banking services. According to the Financial Crimes Enforcement Network (FinCEN), there were 515 banks and 169 credit unions that were providing banking services to the industry as of the end of the first quarter of 2021.

But that doesn't mean that cannabis companies can obtain loans or that the process isn't cumbersome for financial institutions. Banks dealing with an illicit industry like marijuana need to file a suspicious activity report (SAR). FinCEN doesn't count a depository institution in its list unless it receives an SAR (which should be every 90 days). And with FinCEN data showing a drop in the number of banks offering services over the past year, the pandemic and reduced staffing may have exacerbated those filing efforts.

For the cannabis industry, a lack of services means that not only is financing next to impossible, but there is also a greater need to carry cash. That can make dispensaries a target for burglaries, which is why cannabis companies often seek out security services to help safeguard both their assets and employees.

Under the SAFE banking bill, major banks would be free to do business with cannabis companies that are operating legally within their states, without fear of repercussions.

Why SAFE banking still might not pass the Senate

Although Democrats have control of the Senate, it isn't a guarantee they will all vote in favor of SAFE banking. But another reason it may not come into law right now is that Senate Majority Leader Chuck Schumer has his eyes set on even greater changes that involve legalization. In an interview with Marijuana Moment, he said, "I've always been of the view that while certainly we have to deal with the banking and financial issues that we should do them together with legalization." The goal is to get "as broad a coalition as possible" to support the bill.

Banking reform does appear likely to happen, but there are still questions about when that might be if Schumer is first working on a legalization bill. Either way, with the Democrats now in control of Congress amid a strong push for some meaningful marijuana reform, it's less of a question of if change happens and more about when it will take place, and how large the scope of the legislation will be.

Why now may be a great time to hold pot stocks in your portfolio

Since the November federal election, the Horizons Marijuana Life Sciences ETF has climbed more than 68%, well ahead of the S&P 500 and its gains of about 25%. Shares of large multistate operator Curaleaf Holdings (CURLF -0.99%) have risen over 30% during that time while Green Thumb Industries is up over 60%. With marijuana reform in the news and a big state like New York recently legalizing pot for recreational use, investors have been bullish on the industry.

The one significant obstacle remains federal prohibition of pot, which, when it is gone, could open up the floodgates to more expansion and growth. A licensed producer like Curaleaf would no longer need to acquire dispensaries in other states in order to expand its reach across the country. It could simply ship products across state lines, which it can't do today.

But even if outright legalization doesn't happen, marijuana reform seems to be on the horizon -- and that alone could change the prospects for the industry and pave the way for bigger changes down the road. One of them could involve U.S.-based pot stocks moving onto major exchanges like the New York Stock Exchange or Nasdaq, something that Curaleaf executive Boris Jordan is optimistic could happen as early as this year. Canopy Growth CEO David Klein is also optimistic about reform, and believes his Canada-based company will be able to enter the U.S. pot market by 2022.

Regardless of whether you think their projections are overly optimistic, the outlook for the industry is much more favorable than it was just six months ago under a Republican-controlled government, where there was little hope of marijuana reform passing. Research company BDSA anticipates that the U.S. cannabis market will be worth $34.5 billion in 2025 and will grow at a compound annual rate of 18% until then. Holding pot stocks in your portfolio today could set you up for some terrific long-term growth in the years ahead. 

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Stocks Mentioned

Curaleaf Holdings, Inc. Stock Quote
Curaleaf Holdings, Inc.
CURLF
$5.00 (-0.99%) $0.05
Canopy Growth Stock Quote
Canopy Growth
CGC
$2.81 (-1.40%) $0.04
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
HMLSF
$2.60 (-4.41%) $0.12
Green Thumb Industries Stock Quote
Green Thumb Industries
GTBIF
$7.97 (-0.38%) $0.03

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

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