What could state and federal legalisation mean for cannabis stocks?

2021 has been something of a damp squib for cannabis stocks. Going into the year, hopes had been pegged on cannabis sales being legalised at a Federal level.

However, the Biden administration has been more conservative on the issue than anticipated, opting for a position of decriminalisation instead.

Adding to the downward pressure has been a disappointing earnings season for marijuana producers. COVID-19 and oversupply issues have all hurt the bottom line. Aphria [APHA] posted a $361m net loss in its third quarter results, well up on the $120.6m loss seen in the second quarter. Rival Canopy Growth’s [CGC] loss widened to CAD$829m in its most recent quarterly report, up from a loss of CAD$109.6m the previous year.

This is borne out with the Cannabis ETF [THCX] soaring over 136% between 4 January and 10 February to trade around the $30 mark, but falling almost 40% since then (to 27 April’s close). A similar trajectory can also be seen in the Global X Cannabis ETF [POTX], and major holdings like Canopy Growth Corp and Tilray [TLRY], which have both fallen since February.

An uptick for cannabis stocks

On Monday 19 April, the US House of Representatives passed the Secure and Fair Enforcement Banking Act (SAFE), acting as a safe pass for financial institutions to service cannabis operators. This provided a brief uplift for cannabis stocks.

However, wider falls in the US markets and concerns over whether the act would actually pass through the senate led to cannabis stocks falling the next day.

More likely than a straight pass is a compromise that would appease both sides of the house, according to Cantor analyst Pablo Zuanic in an investor note.

“With the considerable limitations of a two-year Congressional term, President Biden’s apparent lukewarm support, and the threat of a Republican filibuster, we are starting to see a ‘compromise scenario’ as quite likely.”

"we are starting to see a ‘compromise scenario’ as quite likely" - Pablo Zuanic, Cantor

Zuanic suggests that a narrower set of bills could work. At a federal level, cannabis would be decriminalised so it is no longer classed as a class one drug, which should suit Democrats. On the banking issue, states would be allowed to decide their own programmes, which would suit Republican lawmakers.

Changes at the state level

Most meaningful change could happen at the state level. Paradoxically, while cannabis remains illegal on a Federal level, more than two thirds of the US population lives in a state where a form of pot is legal.

On 31 March, New York became the 17th state to legalise weed with “No smoking of any kind” signs going up and police instructed not to stop anyone seen smoking a joint.

Global X suggests that New York “could very quickly become one of largest legal cannabis markets in the United States.” Global X points to figures showing legal and illegal cannabis sales could hit $4.6bn by the end of 2023 and $5.8bn by the end of 2027. However, according to Intelligencer, it will take 18 months before recreational marijuana is available in shops in the state.

18 states have now put in place legislation allowing the sale of cannabis. Along with New York, Virginia and New Mexico voted to legalise cannabis sales in April, while Connecticut, Montana, Rhode Island and Delaware are all considering legislation.

“We believe that the US cannabis market is at an inflection point where continued state legalisation will further accelerate sales and help cannabis companies get their footing in advance of potential federal legalisation,” wrote Global X.

If banking legislation happens at the state level, then it could open up the US market more in 2021. That could see cannabis stocks reverse some of the losses experienced in February. Getting Federal blessing might be the prize when it comes to the legalisation of cannabis, but investors should watch out for what’s happening at a state level.