Cannabis stocks have been hot buys in recent weeks on expectations of marijuana reform and potential legalization. Many companies are champing at the bit for the U.S. to fully open its doors -- especially Canadian-based marijuana producers, including Tilray Brands and Canopy Growth, which both see the U.S. market as central to their long-term strategies.
But where those and other pot stocks go in the months and potentially years ahead could be determined in large part by what happens this month.
Mid-term elections could drastically impact the chances for marijuana reform
Midterm elections take place next week in the U.S., and the results could drastically alter the outlook for the marijuana industry, at least in the short term. The Democrats, who are more progressive than Republicans and tend to be more in favor of legalizing marijuana, now control both the House and Senate.
But it's not an overwhelming majority, and historically the president's party loses seats in midterm elections. If that pattern holds this year, then there's a very real possibility that Democrats lose control of Congress once new members take office in January. Should that happen, the chances of marijuana reform could be derailed.
It was already a long shot for serious reform to happen under President Joe Biden; it wasn't until October that he finally made a move on decriminalization, announcing pardons on federal convictions that involved just simple possession of marijuana. Even if that wasn't just part of a strategy to drum up support for the Democrats ahead of the midterm elections, the likelihood of broader, more significant changes diminishes if the Democrats don't control Congress. And if Democrats do still end up controlling Congress, it may not necessarily result in reform for the cannabis industry anyway.
There are, however, also catalysts at the state level that could help boost pot stocks this month.
More states could legalize marijuana
There are 19 states that have passed legislation to permit marijuana for recreational use, and there are another five states that will have marijuana reform initiatives on the ballot in November. Arkansas, Maryland, Missouri, North Dakota, and South Dakota are all looking at potentially legalizing marijuana.
This could be significant for multi-state operators eyeing more growth opportunities. Curaleaf Holdings (CURLF -2.56%) has a presence in 21 states across the country, and it would likely appreciate the potential to expand into new recreational markets. It has four locations already in Maryland, but if the state permits recreational pot, that could open up more opportunities. Not only would the dispensaries generate more revenue within the state, but they might even bring in traffic from neighboring Pennsylvania, where pot is only available for medical use.
Marijuana stocks typically move sharply on legalization hopes
Improving prospects for legalizing marijuana and even talk of legislation to legalize has sometimes been enough to send pot stocks rallying. Take the 2020 federal election as an example. In November 2020, Biden won the presidency and shares of the Horizons Marijuana Life Sciences ETF soared 42% during the month, dwarfing the S&P 500 and its 12% return over the same period. The excitement surrounding the potential for marijuana legalization swept up pot stocks.
Canopy Growth Chief Executive Officer David Klein was so optimistic about legalization that he projected his company would be operating in the U.S. pot market in 2021. Unfortunately, things haven't panned out that way, and pot stocks have plummeted 60% since that red-hot month of November 2020. It's a sobering reminder to investors that the hype about legalization can be short-lived.
Should investors buy marijuana stocks?
It can be a dangerous option to invest in marijuana stocks solely on the hopes of legalization. While pot stocks may get a boost on positive election results this month, they can quickly give back those gains if nothing ends up happening afterward. That's why it's always more prudent to focus on a company's fundamentals. In the case of Tilray and Canopy Growth, these are still businesses that are burning through cash and incurring net losses, and they're struggling to generate consistent growth. Multi-state operators like Curaleaf, meanwhile, are safer investments because they're already operating in the U.S. market and they aren't dependent on federal legalization of marijuana to open up growth opportunities.
That's why if you're looking at pot stocks as potential investments, you're better off investing in multi-state operators like Curaleaf and other, similar companies. Investing based on hopes for legalization could result in a roller-coaster rider for your portfolio.
