Depressed U.S. Pot Stocks Rebound on Leaked Republican-Led Bill to Legalize Cannabis

U.S. Pot Stocks Initially Hampered by Flatfooted Democrats

U.S. marijuana stocks enjoyed a period of serious growth in the run-up to the 2020 election. The Democrats positioned themselves as the cannabis-friendly party that was going to get recreational marijuana legalized at the federal level.

On the campaign trail, Kamala Harris said she wanted to end the federal prohibition of cannabis. Moreover, she was the lead Senate sponsor of the Marijuana Opportunity Reinvestment and Expungement Act of 2020 (MORE Act).

In the run-up to the November 2020 election, then-Senate Minority Leader Chuck Schumer said, “I am fervently committed to getting [legalization] done.” (Source: “‘Vote Democrat to Legalize It,’ Sen. Chuck Schumer tells Leafly,” Leafly, September 14, 2020.)

Schumer went on to say that he would get it done with or without President Joe Biden’s blessing.

The Democrats took the White House and are currently in control of the federal government. But since their decisive win in 2020, the cannabis industry has suffered. Why? Despite owning Washington, D.C., President Biden and Congress have done nothing to chip away at marijuana restrictions.

As a result, once-high-flying cannabis stocks have taken a big hit. Between mid-February and the start of November, the AdvisorShares Pure US Cannabis ETF (NYSE:MSOS) fell by 51%. In comparison, over the same time frame, the S&P 500 rallied by 17%.

Despite that reversal of fortune, the outlook for the marijuana industry remains massive. In 2020, U.S. cannabis revenue jumped by approximately 50% year-over-year to $20.0 billion.

By 2025, U.S. cannabis sales are projected to top $40.0 billion. (Source: “U.S. Legal Cannabis Market Projected to Double to $41.5B by 2025,” New Frontier Data, December 9, 2020.)

Much of that growth will come from states that have recently legalized recreational cannabis and those that are poised to do so.

During the 2020 election, five states had marijuana legalization initiatives on their ballots. They all passed, with Arizona, Montana, and New Jersey voting to legalize recreational cannabis. Mississippi voted to legalize medical marijuana. And South Dakota approved measures for both medical and recreational marijuana.

That momentum has continued in 2021. So far this year, five states (Connecticut, New Mexico, New York, New Jersey, and Virginia) have passed legislation to legalize recreational marijuana.

Some states to keep an eye on next year are Ohio, Missouri, South Dakota, Oklahoma, North Dakota, Arkansas, Maryland, Delaware, Hawaii, Minnesota, Connecticut, and Texas.

Keep in mind that recreational cannabis has been legal in Canada since 2018, and Mexico passed legislation earlier this year. So the pressure is on for the U.S. to follow suit.

Marijuana Stocks Surge on New Legislation Activity

It’s been a different story for pot stocks in November. They surged on November 8 following a raft of legislative action on marijuana.

A House committee approved a bill on November 4 that would require the Department of Veteran Affairs to conduct clinical trials on the therapeutic use of cannabis to treat veterans for post-traumatic stress disorder (PTSD) and chronic pain. This was despite opposition from the Biden administration.

The following day, the House of Representatives approved a $1.0-trillion infrastructure bill that sets aside funding for scientific research into marijuana.

Republican-Led Bill to Legalize Cannabis?

Perhaps most interesting is the word that House Republicans are set to introduce their own marijuana reform bill. A leaked version of the bill called the States Reform Act, led by Republican Nancy Mace, would federally reschedule marijuana. (Source: “A Leak Reveals A Republican-Led Bill to Federally Legalize And Tax Marijuana,” Forbes, November 9, 2021.)

The draft legislation would reschedule marijuana from the controlled substances list and impose a 3.75% excise tax on cannabis sales. Pot would effectively be treated similarly to alcohol and be regulated by the Food and Drug Administration.

As of yet, the bill hasn’t been introduced in the U.S. House of Representatives, but a final version is expected to be filed later this month.

The Republican-led bill is similar to the Democratic-introduced MORE Act in that they would both end the criminalization of cannabis. But the Republican-led bill’s proposed excise tax on cannabis of 3.75% is less than the MORE Act’s proposed tax that would start at five percent and increase to eight percent over three years.

Analyst Take

Republicans taking the lead to legalize cannabis at the federal level is a smart move. More and more states have been legalizing recreational cannabis and collecting millions of dollars in taxes.

On top of that, more and more Americans want recreational cannabis to be legal, even a majority of Republican voters.

Should Republicans introduce their bill and get it passed, it would go a long way to help the party in the 2022 mid-term elections and the 2024 presidential election. It certainly wouldn’t hurt U.S. pot stocks, either.