Why Are Cannabis Stocks Down?

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There are several reasons that could explain the drop, including Sen. Schumer’s acknowledgment that the current draft of the Cannabis Administration and Opportunity Act may not garner enough votes to pass in the Senate.

Wednesday was a historic day for the marijuana industry with the unveiling of the highly-anticipated Senate bill that would federally legalize cannabis.

Details of the draft bill, the Cannabis Administration and Opportunity Act, were released early morning sparking excitement and speculation. Around mid-day, the bill’s sponsors Senate Majority Leader Chuck Schumer (D-N.Y.) and Sens. Cory Booker (D-N.J.) and Ron Wyden (D-Ore.) held a press conference.

Chuck Schumer's Long-Awaited Federal Marijuana Legalization Bill Unveiled
Photo by Kevin Dietsch / Getty Images

While the impact was expected to be felt on cannabis stocks, surprisingly marijuana stocks fell.

Cantor Fitzgerald’s Pablo Zuanic offered several possible explanations for this reaction in his latest analyst note, while also emphasizing that investors should “make use of yesterday’s weakness.” There’s an upside, claims Zuanic who recognized that Wednesday was a historic day for the industry despite the decline of cannabis stocks.

For starters, the Canadian Marijuana Index fell 5.3% for the day, the US Marijuana Index dropped 2.8%, the AdvisorShares Trust AdvisorShares Pure US Cannabis ETF (ARCA: MSOS) lost 3.5%, and AdvisorShares Pure Cannabis ETF (ARCA: YOLO) was down 4.3%. All this while the SPDR S&P 500 (ARCA: SPY) was flat (+0.1%).

Why Did Cannabis Stocks Drop?

According to Zuanic, there are several reasons that could explain these market actions:

  • An ambitious plan — more of an all-out approach instead of a gradual one;
  • Sen. Schumer’s acknowledgment that the current draft may not garner enough votes to pass in the Senate;
  • Sen. Booker’s strong opposition to separate banking reform;
  • White House Press Secretary Jen Psaki revealing that President Biden prefers incremental decriminalization and has not endorsed this marijuana draft bill;
  • Several troublesome parts of the draft like the notion of interstate trade and a 25% marijuana federal sales tax.

Election Results Getting You Stoked About Cannabis Stocks? Here's How To Invest
Photo by boonchai wedmakawand/Getty Images

There are several potential areas of compromise, according to Zuanic, and those include: lowering the 10-pound possession limit; do not allow interstate trade for the first few years; implement the 25% federal tax over 10 years instead of the proposed five; leave expungement to the states; set a limit on the funds for the “opportunity programs.”

Use The Weakens But Choose Wisely

With a certain amount of ambivalence around many aspects of the bill, particularly regarding banking reform, Zuanic advised investors to carefully pick multistate cannabis operators to invest in. Cantor’s top US picks remain Curaleaf Holdings (OTCQX: CURLF), Green Thumb Industries Inc (OTCQX: GTBIF) (CSE: GTII), Trulieve Cannabis (OTCQX: TCNNF) and Cresco Labs (OTCQX: CRLBF).

The analyst further noted that investors should avoid “companies lacking state level depth; financially stretched; with high share-based cops to sales ratios; more focused on complaining about their valuations than running their businesses; those in bed with predatory lending entities.”

“Again, make use of Wednesday’s weakness — selectively, in our view.”

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