This was a very challenging year for pot stocks. Year-to-date, AdvisorShares Pure US Cannabis ETF (NYSE:MSOS) dropped 54.01%, AdvisorShares Pure Cannabis ETF (NYSE:YOLO) declined 57.46%, compared to SPDR S&P 500 (NYSE:SPY) which lost 13.61%.
Looking into some of the biggest cannabis players out there, the situation is pretty much the same. Since the beginning of the year Aurora Cannabis (NASDAQ:ACB) fell 75.57%, Tilray (NASDAQ:TLRY) plummeted 51.96%, Canopy Growth (NASDAQ:CGC) lost 70.29%, Cronos Group (NASDAQ:CRON) declined 24.17%.
Despite the harsh market conditions, reports that long-awaited legislation was finally introduced sent cannabis stocks soaring. The bill from Senate Majority Leader Chuck Schumer, Senators Ron Wyden and Cory Booker - the Cannabis Administration And Opportunity Act (CAOA) - was presented on July 21st. There’s no doubt that the passage of any of a number of cannabis-related reforms would have a similar effect on pot stocks. The question is – how long will the rally last?
What’s more, while many industry experts seem to concur that CAOA's chances of passing are slim. They see the SAFE Banking Act, which would allow for banking access to marijuana businesses, as more likely to reach the President’s desk. Securing Biden’s signature would doubtless have a historic impact on the industry, which consistently struggles with access to financial services.
But, then again…what if it doesn’t? What if none of the fundamental cannabis bills pass in the Senate? What would happen with cannabis stocks? What are other important parameters cannabis investors should keep their eye on aside from these federal reform-related catalysts?
To get some industry experts’ views on this, Benzinga reached out to one of the top cannabis analysts, Cantor Fitzgerald’s Pablo Zuanic and Emily Paxhia, co-founder of one of the longest-running dedicated cannabis investment funds, Poseidon Asset Management.
CAOA Was A ‘Hail Mary’, What About SAFE Act?
“CAOA has no chance of passing. I listened to the hearings, there is far too much negative sentiment in the Senate based on outdated stigmas, not facts. Further, there is too much packed into CAOA for this to get through, this was a Hail Mary bill put forth by Schumer and the supporting democrats,” Paxhia told Benzinga. She, however, still thinks that it may create a path toward other positive outcomes such as the passage of the SAFE Banking Act, which is “a more tolerable piece of legislation for the senators who fear legalization.”
Zuanic agreed that incremental reform would be good for the sector, but he highlighted that the SAFE Banking Act would be a “small positive” for the industry, in that it does not deschedule cannabis and would not enable multi-state operators (MSO) to uplist to leading U.S. stock exchanges. “But given low valuations, of course, it would boost sector sentiment,” he added.
Zuanic also believes that the COAO will not pass. Though if it did, hypothetically speaking, it would cause a rally for U.S. stocks. “There could be long-term questions about the MSO model with interstate trade, but with leading MSOs trading at 1.5x sales we believe risks are to the upside,” he said. As this is only a hypothetical scenario, Zuanic says the discussion should be more on what type of incremental legalization is actually possible.
The Susceptibility Of Pot Stocks Requires ‘Stamina’ From Investors
The marijuana industry is specific, given the plant's Schedule 1 status, which ultimately creates so many obstacles for companies operating in the sector. Lack of access to banking and other financial services and not being able to list on major U.S. stock exchanges are among the industry's formidable challenges. With this in mind, it is easy to understand why cannabis stocks are so susceptible to any and all news heralding possible legal reform.
Pot stocks will continue to “steam as long as the news flow supports the thesis of an incremental compromise type bill,” Zuanic said.
With marijuana stocks dropping again, Paxhia explained that “we are just living in a time of volatility driven by discussions around catalysts for change at the federal level, coupled with a volatile macro and inflationary backdrop.”
And while a decent piece of legislation approved at the federal level would drive positive action in marijuana stocks and raise access for intuitional investors, there are other parameters that investors could focus on in the event that nothing substantial occurs this summer. According to Paxhia, those include upcoming Q2 earnings calls, quarter-over-quarter improvements, decent EBITDA and gross margins and some operators moving to free cash flow.
“We have been investing in cannabis for nine years, we have seen these compressed emerging market cycles play out, but we remain strong in our conviction on the sector,” Paxhia said. “However, in investing, where things are difficult is where opportunities are found, it requires doing the work and having stamina.”
Photo: Benzinga Edit Source: squarefrog_by_pixabay_
