Cannabis stocks have been struggling for years. Since 2021, the AdvisorShares Pure US Cannabis ETF has declined by more than 75%. With no serious movement on marijuana reform at the federal level, despite more states legalizing medical and recreational use, investors have become frustrated with the industry. The red tape makes it difficult for cannabis companies to operate efficiently, and many remain unprofitable.
There is, however, a potential catalyst on the horizon this year which could give the industry a much-needed boost, and which may help cannabis stocks rise in value. Given that it is an election year, cannabis may benefit from some positive developments in the months ahead.
Is cannabis back on the president's radar?
President Joe Biden recently held his State of the Union address, and what got the attention of many cannabis investors was the mention of marijuana. It's not something the president normally discusses, but in his speech, he highlighted police reform and reviewing the classification of marijuana and stated that "no one should be jailed for using or possessing marijuana."
The president didn't promise anything new on marijuana or suggest that further movement or reform is coming. But the mention of marijuana, especially with the federal election on the horizon this year, is certainly noteworthy as it suggests that the topic could be on his radar. With cannabis growing in popularity, any talk of legalization could win over voters in what may be a tight election contest later this year.
The last election cycle was a positive one for pot stocks
In 2020, many pot stocks had great years. A big part of the reason was due to the hope and excitement that a new Democratic government might be receptive to marijuana reform. In 2020, shares of Trulieve Cannabis soared 167%, and fellow multi-state operators Green Thumb Industries and Curaleaf Holdings saw their stocks rise by 151% and 90%, respectively.
Investors may be more skeptical this time around, as a change in government after the 2020 election didn't have the positive effect many were hoping it would for the industry. But with Biden's government taking a look at reclassifying marijuana from a Schedule I substance down to a less restrictive category, there has been at least some hope that changes could be coming. While legalization may still be a long shot, marijuana could be an election issue that generates interest from the public later this year, and that much-needed spotlight may help rally some badly beaten-down pot stocks.
Valuations in the cannabis industry are incredibly low
Curaleaf, Green Thumb Industries, and Trulieve Cannabis are three of the top producers in the marijuana industry. These companies all generate more than $1 billion in annual revenue. But in terms of their price-to-sales multiples, these stocks are trading at some much lower valuations than in recent years.
Cannabis P/S ratios data by YCharts
For long-term investors, these could be tempting stocks to load up on, as they could possess a lot of upside in the future.
Is now the time to buy pot stocks?
Pot stocks are risky investments, and even the leading companies (Trulieve, Curaleaf) remain unprofitable. Green Thumb has turned a profit, but with a margin of just 3%, it isn't exactly generating a boatload of earnings.
These are still volatile stocks to put in your portfolio, but if you're willing to hang on for long haul, they could pay off with significant returns down the road given their low valuations. Cannabis investors shouldn't expect a growth catalyst this year from the president or the election, but it may not be surprising if one arises.
If you're prepared to hold for the long term and are OK with the risk, now may be a good time to add some exposure to the cannabis industry to your portfolio. But you should go into it knowing that marijuana legalization may still not happen in the U.S. anytime soon, and that it's by no means guaranteed to happen regardless of who the next president is.
