Cannabis stocks drop as federal legalization efforts loses momentum

Cannabis stocks have plunged 50% from their highs earlier this year as a lack of movement in U.S. Legalization efforts has triggered an exodus of retail traders from the sector.

Stocks are retreating after starting the year with a bang following Democrats seizing control of the Senate and raising hopes for federal legalization. The rally picked up steam in February as names like Tilray Inc. And Sundial Growers Inc. Joined the growing meme-stock phenomenon, with both more than doubling in the course of three days that month.

The biggest fund in the sector, ETFMG Alternative Harvest ETF, is down 50% from Feb. 10, when it hit its highest level in nearly two years. Better known by its ticker MJ, the $1.25 billion fund saw investors withdraw a net $48.2 million between July 5 and Aug. 27, when it slid 18%.

MJ and the Horizons ETF primarily track Canadian cannabis stocks, but U.S.-focused ones aren’t performing much better, with the AdvisorShares Pure U.S. Cannabis ETF down 41% from its Feb. 10 high.

The waning interest is also reflected in retail demand. At the peak in February, retail investors bought more than $2.5 billion of pot stocks over the course of a week, data from Vanda Securities show. Since then appetite has dried up, with inflows as low as $73 million the week of Aug. 16, according to Ben Onatibia, senior strategist at the research house.

“Retail investors became impatient with the lack of clarity and slow changes that are taking place in Washington,” said Charles Taerk, chief executive officer of Faircourt Asset Management, which acts as an adviser to the cannabis-focused Ninepoint Alternative Health Fund.

Initial wave

The lack of federal movement since the initial wave of enthusiasm, may mean that cannabis isn’t high on the Biden administration’s priority list and lawmakers are more focused on COVID relief and passing a massive infrastructure spending package.

“There’s been an absence of tangible headlines and progress out of Capitol Hill,” said Vivien Azer, cannabis analyst at Cowen & Co.

While Senate Majority Leader Chuck Schumer released a discussion draft of a bill to legalize pot earlier this summer, Azer’s colleague Jaret Seiberg said he expects “little real progress this year.”

The changing fortunes of pot also show how quickly a cult-like sector can go from hot to cold and back again. Similar to cryptocurrencies, pot stocks have surged and tumbled as investor enthusiasm waxed and waned along with the outlook for legalization in various jurisdictions.

However, unlike more speculative sectors, industry fundamentals are strong, at least for those companies with operations in multiple U.S. States, known as multistate operators or MSOs. With several more states working to implement legal sales of recreational pot, including New York and New Jersey, more growth is likely on the horizon.

“Most of the U.S. MSOs delivered low-to-mid-teens sequential revenue growth, which is very healthy, and most of them posted accelerating revenue growth in the second quarter,” said Azer, whose top pick in the sector is Green Thumb Industries Inc. “At a minimum, it makes the valuations that much more interesting, that the companies continue to grow their revenues and profits regardless of what happens on Capitol Hill.”