Cannabis stocks are living up to their reputation for wicked volatility. Most of them are down 25% or more in the past week.
What the heck’s going on? Traders had piled in on the hopes that federal banking reform favoring cannabis companies would be included in a defense funding bill this month.
Not going to happen, responded Senate Minority Leader Mitch McConnell (R-KY). He didn’t just block inclusion of cannabis banking reform in the defense bill. He said he’d keep it out of federal government spending legislation, as well.
Ouch. This had been seen as another avenue for the legislation.
Leading up to these negative developments, cannabis banking reform proponents Sen. Chuck Schumer (D-NY) and Sen. Cory Booker (D-NJ), had signaled the odds were high that “SAFE banking” would be approved this year in the lame duck session of Congress. They want to get it through while Democrats still controlled Congress. “SAFE banking” refers to the Secure and Fair Enforcement Act, which would give cannabis companies access to banking services including the use of credit cards in dispensaries.
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What to Do now
It’s impossible to “call the bottom” for a sector, but it’s probably too late to sell. And there’s still an outside chance headline news out of Washington, D.C. could make the group pop, say analysts.
Meanwhile, for long-term investors, the cannabis group looks like a solid buy, given how much the stocks have been hit. Several medium-term trends remain quite bullish. Yet the stocks are being decimated by disappointed traders who had bet on help from politicians in Washington, D.C.
3 Reasons Cannabis Stocks Look Like a Buy
1) The cannabis market will continue to expand, regardless of what politicians in Washington, D.C. do. New York is rolling out dispensary regulations, and legal sales will start soon. New York will be a huge market. Connecticut and Rhode Island will start legal sales of recreational cannabis soon. Maryland and Montana are now working on the legalization of recreational sales.
2) Europe is on the cusp of major reform. Germany is taking the lead. It’s finalizing proposed legislation that will legalize sales of cannabis for recreational use. That may set off a domino effect in Europe, say analysts.
Continued reform in the U.S. and Europe supports very bullish cannabis sales projections. “The legal U.S. cannabis market size is expected to triple by 2030, reaching an estimated $75 billion in annual sales,” says Trulieve Cannabis (TCNNF) CEO Kim Rivers. Her growth forecast doesn’t even include market expansion, as more states and Europe legalize recreational use sales. The research firm Headset projects 13% growth next year.
3) A few wild cards could still send the group higher. One option in Washington is that SAFE banking gets introduced as a standalone vote before the new Congress comes in on January 3.
That’s when Republicans take control of the House, reducing the odds of favorable cannabis legislation. While cannabis reform has significant support among voters and even on the right, Republicans are generally less favorable. According to a PEW Research Center poll in October, 59% of U.S. adults say cannabis should be legal for medical and recreational use, and only 10% say it should not be legal at all.
Another wild card is that SAFE banking may still be attached to an omnibus federal spending bill or a continuing resolution that funds the government. “SAFE is not dead yet,” says Cantor Fitzgerald analyst Pablo Zuanic, citing widespread support among politicians. He thinks more than 60 senators support SAFE banking. Previous iterations of the bill were co-sponsored by 42 senators including nine Republicans. “How often do bills get that many Senate co-sponsors? Rarely.” The SAFE Banking Act has also passed in the Democratic-controlled House several times.
To be sure, these are wild cards. But we don’t need actual SAFE banking passage to see the group move higher. “Any little piece of optimism out of the Hill could mean an outsize market move,” says Larry McDonald of the Bear Traps Report. “You could easily have a three- or four-day period where it looks like there’s a chance something could get in the omnibus spending bill.”
Trading aside, the selloff creates an opportunity for long-term investors. “Taking a one-to-two-year view, we would be buyers of the bigger multistate operators here that are well capitalized,” says one sector analyst. To find out the best names to consider, learn more by subscribing here.
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