In the weeks following the 2020 election, hopes were high that marijuana stocks would perform exceptionally well in 2021. There was hope that they would be the next great investment class propelling both small and big-time investors to new levels of wealth. With 2021 nearly gone, marijuana stocks have fizzled. Why?
Cannabis is not losing ground as a consumer product. More than three dozen states have active medical cannabis programs in place. Recreational use is allowed in eleven of those states. All told, the market is worth billions of dollars annually. So why aren’t investors interested in putting money into cannabis companies?
The answer is as simple as one word: Washington. Neither investors nor banks have seen Washington move the needle on marijuana. And until that happens, investment funding will be hard to come by. Stocks are not going to perform well, and private equity investors are going to remain cautious.
1. Differences in State Programs
As an investor, one of the things you have to look at before investing in a cannabis stock is state law. Why? Because marijuana is still illegal at the federal level. Those companies involved in the industry operate on a state-by-state basis. Individual state laws affect what those companies can do.
Deseret Wellness is a medical cannabis pharmacy in Park City, Utah. They operate in one of the strictest medical cannabis states in the country. The state has only licensed fourteen pharmacies to date, along with six growers and a larger number of processors. Things are so tightly controlled that there isn’t a lot of wiggle room.
On the other hand, states like Oregon and Colorado have legalized both medical and recreational use. Their growing operations and dispensaries number in the thousands. It is easier for investors to put their money into companies in both those states. So again, why are stocks fizzling?
2. Stocks and the Federal Government
An individual investor can put money into a local cannabis company without too many worries. The same isn’t true for investing in a company listed on a federally regulated stock exchange. Again, remember that Washington still considers marijuana and THC illicit substances.
If you are an investor looking for the next big stock on NASDAQ for example, are you going to buy OTC shares of a marijuana company that is technically illegal under federal law, or are you going to put your money into a more traditional company listed on the exchange?
Investors are wary of putting their money into cannabis stocks because Washington has failed to move the needle on legalization. At least that’s the opinion of pundits at numerous media outlets, including Politico’s Paul Demko. He says that banks and investors do not anticipate any movement on legalization over the next 12 months.
3. Cannabis a Fractured Market
The current status quo has forced the cannabis industry to remain fractured. Nothing will change until something is done to reconcile the differences between federal and state laws. And as long as the market remains fractured, investors will be reluctant to purchase cannabis stocks. The stocks are just too risky right now.
A bigger problem for cannabis proponents is that the Democrat party has failed to act. At the beginning of 2021, there were high hopes that marijuana legalization was just one vote away. Senate Democrat leader Chuck Schumer even went as far as to promise he would have a bill on the president’s desk by summer. Nothing has happened.
Federal lawmakers continue to show reluctance over marijuana decriminalization. And as long as this is the case, marijuana stocks aren’t going to move too much higher.
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