Pot Stock Investors Bullish After New Bill Is Introduced, But There’s a Catch

Marijuana Stocks Face Uncertain Future

There are few things that investors dislike more than uncertainty. While volatility can lead to massive surges upward, it can just as easily lead to crippling losses.

As such, buy-and-hold strategies that aim to maximize returns tend to seek out securities in industries with fairly solid and predictable progressions.

Right now, pot stocks are in an interesting position. Marijuana stocks represent something of a paradox at the moment.

On the one hand, there’s certainty that the pot stock market is stuffed with potential, and certainty that more legalization is to follow.

On the other hand, there’s a great deal of uncertainty. When will marijuana stocks be legalized in major markets, how will future legislation dictate the way the weed market is run, and which pot stocks will emerge as the dominant ones?

That dual nature is precisely why there’s such volatility in the marijuana market.

Everyone knows the pot market has potential and that gains will definitely be made, but all the timelines and particulars are tenuous because the new markets have to figure out how to handle converting weed from an illegal to legal substance.

That brings us to some recent marijuana news: Senators Ron Wyden and Cory Booker have released draft legislation that would federally legalize cannabis in the U.S. (Source: “Chuck Schumer Unveils Draft of New Legislation to Legalize Marijuana,” Rolling Stone, July 14, 2021.)

That’s good for marijuana stock bulls. As I’ve written time and time again, the largest pot-stock gains will be made when federal U.S. marijuana legalization becomes a reality.

The Cannabis Administration and Opportunity Act (CAOA) would remove cannabis from the federal Controlled Substances Act and then put the onus on state governments on how they want to legalize the drug—if at all.

The bill would also help many of the poor souls locked away in jails across the country for the “crime” of being in possession of or dealing marijuana. Remember, we’ve had several presidents and vice-presidents who’ve admitted to using the drug in their younger years, making the perverse nature of jailing some people for its use but not others all the more apparent.

“This is monumental,” said Senate Majority Leader Chuck Schumer during a press conference announcing the draft bill. (Source: Ibid.)

“At long last we are taking steps in the Senate to right the wrong of the failed War on Drugs…The War on Drugs has really been a war on people, particularly people of color. The [CAOA] would help put an end to the unfair targeting and treatment of communities of color by removing cannabis from the federal list of controlled substances. It’s not just an idea whose time [has] come — it’s long overdue.”

In the bill, the Food and Drug Administration (FDA) would regulate the production, distribution, and sale of cannabis.

That would be combined with a federal excise tax on cannabis, which would be similar to the taxes on alcohol and tobacco. A portion of that tax revenue would be dedicated to researching cannabis and its effects, while another sum of the tax revenue would be dedicated to restorative justice programs for communities impacted by the War on Drugs. (Source: Ibid.)

Chart courtesy of StockCharts.com

Despite that good news, marijuana stocks have recently dropped in price. You may be wondering why. After all, American pot legalization is the holy grail of the marijuana industry.

There are a few reasons.

The most important one is that this isn’t the first time a marijuana legalization bill has been proposed by these senators. And every previous time such a bill has been proposed, it has failed.

Granted, the Democrats hold a majority in the House and Senate (at least for the moment), but that majority is slim. And with every proposed legislation now being subjected to the filibuster’s 60-vote threshold in the Senate, there’s little chance of it passing.

Then there’s the issue of CAOA being at the first-draft stage. That means it’s going to be altered and, likely, morphed into a piece of legislation that may ultimately be less favorable for pot stocks.

Moreover, what’s already in the current draft isn’t that great, in that it allows state governments to choose whether to legalize cannabis. What pot investors were hoping for was grand, sweeping legislation that would make the drug legal nationwide, similar to what happened in Canada.

But due to the nature of the U.S. as a republic, that’s a harder task to achieve.

Still, even with those setbacks, the introduction of CAOA is good news. Whether the bill passes, it’s still raising the issue.

As I’ve highlighted dozens of times, not only is the insanity of putting people in jail for marijuana clear for all to see, but the absurdity is doubled when you consider that the U.S. has marijuana that’s legal at the state level but illegal at the federal level.

This can’t last, and it won’t last.

When federal U.S. pot legalization eventually comes—whether with CAOA or the next bill—it’s going to give a major boost to marijuana stocks.

Unfortunately, it doesn’t look like CAOA is going to be the big win that marijuana investors were hoping for. Having said that, this doesn’t dim my bullish projection for pot stocks at all.

Analyst Take

As I’ve said many times before, U.S. marijuana legalization is inevitable; it just may take longer than we’d like.

While the introduction of CAOA is a good step, the bill probably isn’t what’s going to make the final push toward federal U.S. marijuana legalization.

Still, marijuana stocks are in a very enviable place right now, with low prices and high potential. That’s great for long-term pot-stock investors.