Pot Stocks Drop, but Is Now the Time to Buy or Sell?

pot stocksMarijuana Stock Correction Is Only Temporary

Stop me if you’ve heard this one before: weed stocks rally as the industry begins to heat up due to positive legalization developments, only for a hiccup in the political proceedings to send pot stocks into a correction.

Having been reporting on the legal cannabis industry for over four years now, it’s becoming predictable, almost boring.

We continue to see marijuana stock investors go into a frenzy over good news, only to have the smallest obstacle upset the market and send share prices falling. And that, dear reader, is exactly what we’re seeing again right now.

Despite 2021 getting off to an excellent start for weed stocks, in recent weeks, we’ve begun to see share prices fall somewhat.

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Why? The momentum that was building behind federal U.S. marijuana legalization has, in the eyes of the market anyways, begun to peter out.

But is it true? Well, yes and no.

Chart courtesy of StockCharts.com

Federal U.S. Cannabis Legalization Delayed

I’ll be the first to admit that I was excited as everyone else was when, earlier this year, U.S. pot legalization seemed all but certain.

Remember that President Joe Biden just came out of an election in which pretty much the entire Democratic Party field had supported some form of marijuana legalization. Even his vice president, Kamala Harris, had come out in support of legalizing pot in the U.S.

Yes, Biden has never been a staunch ally of the pot legalization movement, but to be frank, he has never been one for steadfast political convictions.

Over his four-plus decades in politics, Biden has evolved on a number of issues as they grew more popular among the Democratic Party base. With U.S. marijuana legalization enjoying wide, cross-party support, it seemed like a no-brainer that Biden would evolve on this issue, too.

And to be fair, there still is that chance.

It just may not happen in 2021 (or 2022, for that matter). As far as political strategy goes, it would be wise for Biden to promise U.S. pot legalization going into the next election (something that worked out quite well for Canada’s Prime Minister Justin Trudeau).

And if Biden chooses not to run again in 2024? Well, it’s almost a guarantee that whoever succeeds him as the Democratic Party’s presidential candidate is going to be pro-marijuana legalization.

So even if Biden isn’t the one to legalize marijuana in the U.S., it’s almost certain that the next Democratic president will be.

The issue for the pot stock market, of course, is that it wants pot legalization now.

That brings us back to the current market moves. Biden was always iffy on marijuana legalization, and while there’s still hope he could be the president to enact it in the U.S., it’s by no means a certainty.

What’s more, analysts have been disappointed in the lack of bipartisan cooperation in the House and Senate. The COVID-19 relief bill got zero votes from House and Senate Republicans. If the two parties can’t even agree on that bill, how are they going to find common ground on something as polarizing as U.S. pot legalization?

And, frankly, those analysts have a point. While there are many Republicans who support marijuana legalization, the political atmosphere is such that it’s almost impossible to cross the aisle and work with the other side.

What’s more, you just know that a Democratic Party-led bill would contain a number of policies that would only be tangentially related to pot legalization. That would, in turn, make passing it almost impossible. Due to the filibuster, a bill would require 60 votes in the Senate.

In other words, the prospects of U.S. marijuana legalization getting through Congress anytime soon is doubtful. What’s more, while Biden could get a lot of movement on pot legalization through executive orders, he’s not likely to make any significant moves on that front.

So even though Senate Majority Leader Chuck Schumer, alongside Senators Cory Booker and Ron Wyden, said in a joint statement on February 1 that “[e]nding the federal marijuana prohibition is necessary to right the wrongs of this failed war and end decades of harm inflicted on communities of color across the country,” we’re likely not going to see much movement on the issue in the near future. (Source: “Cannabis Stocks Slump for Second Straight Week as Prospects Dim for Nationwide Legalization,” CNBC, March 5, 2021.)

But this is the stock market we’re talking about here. “Near future” is a nebulous term. We’re likely to see major advances in artificial intelligence (AI) in the near future, but that could mean something like 20 years from now—and that hasn’t stopped AI-related stocks from going bonkers.

With marijuana stocks, not only is federal legalization likely to happen within the next two to five years, it’s practically inevitable that it will happen within the decade. What’s more, there are other markets, like Germany and Portugal, that could open up in the meantime.

While neither country is as juicy or rich as the U.S. market, if a few European countries were to legalize marijuana—such as Germany, France, Italy, Spain, and the U.K.—their combined market would be about the size of the U.S. market, both in terms of population and gross domestic product (GDP).

Of course, there’s a lot that has to happen before we see marijuana legalization in all those countries. We could realistically see legalization in just one of them, and that alone would be enough to send weed stocks soaring.

Analyst Take

In other words, pot stocks aren’t as well positioned as they seemed to be in January, but they’re still in a very enviable place.

Their future is still extremely favorable, as federal U.S. pot legalization is still well within striking distance. As such, we can expect to see marijuana stock prices rebound before too long.