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The Biggest Reason to Believe in Cannabis Stocks This Year

Cannabis stocks rose briefly at the end of 2022 on hopes for SAFE Banking passage. That didn’t come to pass, but there’s a good reason to believe the sector can turn around in 2023.

Cannabis Leaf

Most investors are familiar with the phenomenon of year-end tax loss harvesting, where investors liquidate beaten-down positions to offset capital gains accrued from successful trading.

A related tactic is buying those very same beaten-down stocks in the new year, which frequently leads to strength and outperformance in the first quarter as the loss harvesting abates.

Cannabis stocks, which ended 2022 near multi-year lows, fit that bill. Yet there are still bullish trends for the sector, so a tax loss selling rebound in the first two or three months of the year won’t surprise me. If I’m right, cannabis names are buyable for the rebound effect in January 2023.

But if cannabis stocks are getting hit so hard, doesn’t that tell us they have challenges they will never be able to shake? No.

Cannabis stocks are down because sector investors were disappointed by lawmakers in Washington, D.C. who had suggested they’d secure approval of favorable banking reform by year-end while they still had the votes. This reform would have been a game changer since it would provide cannabis companies access to banking services and maybe even listings on major exchanges.

Ultimately, however, cannabis reform advocates – in particular Sen. Majority Leader Chuck Schumer (D-NY) – decided not to make banking reform a priority. Sector reform known as the SAFE Banking Act failed to make it into a key federal spending bill, where it would have hitchhiked a ride to approval.

A lot of traders had piled into the group from October through December on expectations that the SAFE Banking Act would be approved by year-end. When it became clear this wasn’t going to happen, they all had to sell to get out. This created order imbalances that droves stocks a lot lower, in a hurry.

Sentiment is now dismal, which makes the group attractive from a contrarian point of view. Not even the sell-side analyst community, which often has an inherently positive bias, can muster many reasons to buy the cannabis sector. A lot of negativity is priced into cannabis stocks (and the market overall) right now.

Despite the bleak consensus view, there are several potential catalysts in the year ahead.

A Cannabis Stocks Catalyst at the State Level

State Markets Continue to Open up

Perhaps the biggest catalyst is that states will continue to open up legal markets for adult recreational cannabis use, regardless of the status of cannabis at the federal level. The momentum continues. Here are the highlights.

New Jersey reported third-quarter cannabis sales grew 27.9% sequentially to $177.7 million. This was the second quarter that both recreational and medicinal sales have been legal. Illinois reported November cannabis sales grew 4.2% year over year to $158.7 million. New York will open its first recreational use dispensary in Manhattan on December 29. Connecticut is opening recreational use dispensaries on January 10. Rhode Island started recreational sales in early December. Maryland should commence legal recreational use sales this year, following voter approval last November. Minnesota Gov. Tim Walz (D) recently said that he expects the state to legalize adult recreational cannabis by May 2023. North Carolina Gov. Roy Cooper (D) said in a recent media interview he thinks a medical cannabis legalization bill can pass in the upcoming legislative session.

The upshot is that for the three months ending November 2022, the U.S. state-licensed market grew 2.2%, say Stifel cannabis sector analysts W. Andrew Carter and Andrew Partheniou. That suggests annual growth in the 9%-10% range. “We believe the reacceleration in U.S. category growth is encouraging.” The analysts note that 35% of the U.S. population lives in markets that allow legal recreational use. Another 13.5% of the population lives in five states set to open up legal recreational used over the next two years, meaning New York, Maryland, Virginia, Connecticut and Montana.

To find out about other catalysts that may turn sentiment and support a tax loss selling rebound in cannabis names in 2023, and some of the best names to consider owning, consider subscribing to the Cabot SX Cannabis Advisor by clicking here.

Michael Brush is an award-winning Manhattan-based financial writer who writes a stock market column for MarketWatch. He is editor of Brush Up on Stocks, an investment newsletter. Brush previously covered the stock market, business and economics for the New York Times, the Economist Group, MSN Money, and Money magazine.