Feeling Risky? Marijuana Stocks May Jump From Legislation

PUBLISHED Jul 17, 2022, 6:53:45 PM        SHARE

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If you're looking for growth stocks, one area of potential growth is recreational marijuana. Cannabis stocks are probably not a big part of most investors' portfolios, but that could change as the United States moves closer and closer to nationwide acceptance of recreational marijuana. Over the past decade, nineteen states and Washington, D.C. have legalized recreational marijuana, which is a tremendous market expansion!

Bullish: Why Marijuana Might Grow

Potential Big Boost: a Senate Bill

The Cannabis Administration and Opportunity Act is set to be introduced this coming week after receiving feedback from key committees last year. This federal law would decriminalize recreational marijuana nationwide by removing it from the list of controlled substances. While the likelihood of it passing in its direct form are slim, as it would require ten Republican votes to avoid a filibuster, there is a chance that Republicans are willing to consider a liberal-leaning Democratic bill in the political aftermath of the Roe v. Wade reversal and the January 6 committee hearings.

State-by-State Legalization

In 2022, five states have marijuana legalization on the ballot. If all of them pass, it would be a significant expansion of the recreational marijuana market.

Long-Term Outlook on Marijuana is Optimistic

Polls indicate significant majority support for the legalization of marijuana, and political support for going after those accused of using marijuana illegally has decreased. Historically, this makes sense in comparison to the failure of Prohibition by the early 1930s. Optimists for legalized weed envision a swift growth of the industry post-legalization.

Big Tobacco May Merge With Big Cannabis

One of the biggest cannabis stocks, Cronos Group (CRON), received a $1.8 billion investment from tobacco giant Altria (MO) in 2021. If federal legalization of marijuana does come to pass, look for experienced tobacco growers to leap at the opportunity to expand into a new cash crop. Cannabis startups would likely be snapped up, with the buyouts benefiting stockholders.

Bearish: Startups and Stigma

Cannabis Companies are New

Like any startups, cannabis companies are risky. After all, legalized marijuana has only existed in any form in the United States for about ten years. This means it's still highly volatile, even with "angel investors" from Big Tobacco. Even though CRON has strong financials and expanding revenue year over year, its stock price has fluctuated due to recent economic turmoil.

Little Love From Big Finance

Partially because of high risk, and partially due to lingering stigma over marijuana being an illegal drug, big finance companies may not want to underwrite cannabis startups. This can result in cannabis firms operating on shaky foundations, with relatively little cash. Sure, the product is popular...but producers need to have solid business practices and cash reserves in case of recessions.

Culture Wars Return

While Western society has certainly moved strongly in the direction of accepting recreational marijuana, recent years have seen a resurgence of alleged "far right" conservatism in both the U.S. and Europe. It remains to be seen whether the "culture wars" will result in attempts to re-criminalize marijuana, but they could certainly slow the expansion of de-criminalization. Liberals, facing attacks on multiple fronts, will likely put marijuana legalization on the back burner. Politically, pushing for recreational marijuana is not a hot topic in 2022 with everything else going on.

Bottom Line: Buy if You're a Risk-Taker

If you want some excitement, it's probably okay to stray from blue chips and buy some CRON. Although the consensus right now appears to be a hold from analysts, they do project its revenue to grow. While liberals may not be willing to push hard for legalization, I don't think that conservatives will want to push back. I predict at least some of the five states with marijuana legalization ballot initiatives in 2022 will legalize it, expanding the market. And, just like with alcohol stocks, a recession won't necessarily put a damper on demand for weed - it's a stress reliever!

I/we have no positions in any asset mentioned, but may initiate a position over the next 7 days


Cronos Group Inc
Return: -30.41%


Return: -30.41%

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