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Cannabis stocks poised for second wave on US and UN legislation

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It looks to us as if the cannabis sector may be poised for a second wave of investor interest, as the US House of Representatives has now passed the most comprehensive liberalisation of cannabis laws that the country has ever voted on, namely the Marijuana Opportunity, Reinvestment and Expungement Act, aka MORE.

The bill calls for the removal of cannabis from the list of federally controlled substances and the erasing of certain federal convictions.

We think this is a good indicator of what we are likely to see for the cannabis industry, in terms of the legislative agenda of the incoming Biden administration.  The bill was timetabled even before Biden has entered the White House; it means US states will be able to protect themselves from interference into their individual cannabis laws, and will provide major benefits to cannabis businesses, which will be able to conduct operations in the US without threat of prosecution.

“One of the key ingredients to a fully functioning legal market is actual clear and transparent policy, so this is a huge step in the right direction,” said Rahul Bhushan, co-founder of ETF fund manager Rize ETF. “The move certainly gives more fervour to the US cannabis movement.”

Rize ETF has a London-listed ETF product, the Medical Cannabis and Life Sciences ETF (LSE:FLWR) which tracks an index of cannabis and life sciences stocks. It uses the Foxberry Medical Cannabis and Life Sciences Index, which had a 34.8% net return in November (USD terms).

The anticipation of a friendlier and more pragmatic Biden administration has fueled sentiment that further regulatory change is afoot, and should also facilitate the passage of the Secure and Fair Enforcement for Mortgage Licensing Act. It is also possible that Biden will direct the Drug Enforcement Administration to move cannabis to a less restricted Schedule II status.

There will be major benefits to an expanding US cannabis sector, as companies will be able to compete on even terms re: taxes versus other industries, will receive improved access to capital, and should be opened up to more institutional investment. Historically, the sector has been fueled by private investment, but this move could provide companies with scope for immense growth.

US states moving to legalise cannabis

Trump’s defeat last month also saw five US states vote to legalise medical and/or recreational cannabis. This included Mississippi, which has voted to permit medical cannabis for the first time.

Companies in the sector are starting to put out some very impressive numbers. Sitting in the Rize ETF tracker is GrowGeneration Corp NASDAQ:GRWG, which contributed 60% of the returns to the Foxberry index in November. Others include GW Pharmaceuticals [LSE:0IT7] in the UK, and NewAge Inc NASDAQ:NBEV in the US. These are companies that are at the forefront of rapid developments in the market.

We anticipate further progress on the legislation once Joe Biden is sworn in as president. Outside the US we are also seeing the cannabis industry making inroads, for example with the UN voting on 2 December to remove cannabis from the 1961 convention on narcotic drugs. This will affirm that there is growing support for the liberalisation of cannabis policy and gives important cover to all the countries that may have been considering reform.

Overall, these legislation trends seem to be paving the way towards considerable expansion of the medical cannabis sector in 2021 and the anticipated second wave of growth in the industry.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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