Market Trends

Positive Blazes in the Cannabis Market: Investors Illuminate Opportunities Amidst Policy Hopes

In recent months, investors have been meticulously scouting for undervalued assets, with an optimistic gaze pointing toward the burgeoning cannabis industry. Bolstered by speculative hopes for pivotal policy shifts within the United States, cannabis companies have become a beacon of potential for returns that may significantly outshine the stock market's broad trends.

As the world inches closer to the globally recognized, albeit unofficial, cannabis celebration of April 20—affectionately known as 4/20—the performance of marijuana-related investments provides a compelling narrative. Despite the sluggish progression in regulation, the cannabis sector has demonstrated an impressive outperformance relative to the overall market starting from October.

A Green Surge Outperforming the S&P 500

Considering the past six months, analysts have pinpointed that certain exchange-traded funds (ETFs) and an index tied to the cannabis sector have effortlessly surpassed the S&P 500 Index in terms of growth. Notably, the Advisorshares Pure US Cannabis ETF has witnessed a commendable ascent, topping 30% in gains. Simultaneously, the Roundhill Cannabis ETF—recognized in trading circles by the ticker WEED—has enjoyed an even more striking rise of over 40%. Such robust advances notably eclipse the S&P 500's 17% rise.

The MJ Pureplay Index, which meticulously tracks a diversified portfolio of 100 cannabis-driven stocks across the globe, has not been left behind in this green rush, amassing a noteworthy 26% gain within the same window of time.

Investors' Commitment Amid Challenges

Dan Ahrens, the managing director of Advisorshares Investments LLC, offers insight into the prevailing investor sentiment, which appears surprisingly tenacious. Ahrens acknowledges that throughout challenging periods, a resolute belief in the inevitable federal reform has kept shareholders rooted firmly in their positions.

Pioneers in Profitable Growth

Empirical data extracted from the past half-year reveals certain standouts within the bustling cannabis sector. Trulieve Cannabis Corp has soared, boasting a doubling in stock value. Additionally, both Green Thumb Industries Inc. and Curaleaf Holdings Inc. have each charted upwards by more than 35%.

A Potential DEA Reclassification as a Game Changer

Expectations are now escalating with investors keeping a keen eye on the U.S. Drug Enforcement Administration (DEA) for what could be a game-changing reclassification of cannabis. The anticipation is for cannabis to be acknowledged as a controlled substance with recognized medical advantages, akin to substances such as ketamine, anabolic steroids, and testosterone. As of the current scenario, marijuana shares an unwelcome categorization alongside LSD and heroin.

The DEA's deliberation on this reclassification was prompted in September by the Biden administration and has been a focal point of investor attention ever since.

The adoption of this reclassification holds the promise of relieving cannabis companies from the shackles of hefty taxes, thus reinforcing their potential for substantial cash flow. Furthermore, this paradigm shift could be the proverbial spark needed to propel Congress toward the passage of the Secure and Fair Enforcement (SAFE) Banking Act. This legislation could be transformative for the industry, granting banks and credit unions the green light to collaborate with legal cannabis operations.

Renowned investment leader Ross Gerber, the president of Gerber Kawasaki Inc., provides a bullish outlook on what the future may hold, with predictions of stocks rallying by 100% in the wake of such policy reformation and subsequent legislative momentum. His firm, taking advantage of the situation, has commenced purchases of the Advisorshares ETF, citing attractive valuations owing to a significant drawdown.

Gerber's optimism is also rooted in the resilience of cannabis companies, which he believes possess remarkable operational efficiency—crucial for survival in a sector still navigating through regulatory ambiguity.

A Resilient Industry with Unexplored Potentials

Historical prices illustrate just how bargain-priced pot stocks are at present, in stark contrast to the valuations seen during the advent of the cannabis gold rush. To put it into perspective, the Advisorshares ETF has declined by more than 80% since its peak in 2021, and the Roundhill WEED fund has also conceded more than half of its value.

However, within the complications surrounding potential DEA announcements—which remain unencumbered by definitive timelines—lies an element of unpredictability. Dan Ahrens invites investors to reckon with the inherent complexity of forecasting such monumental decisions.

The trajectory of the SAFE Banking Act further adds to the speculative narrative. While the Senate Banking Committee passed the legislation in September, it hasn't progressed to a floor vote. Despite this, Senator Chuck Schumer (D-NY), the Majority Leader, underscores that the bill remains a legislative priority, possibly looking to secure its passage before the electoral spotlight intensifies in November.

Analysts at TD Cowen, like Jaret Seiberg, are weighing in on the probable directions for SAFE, suggesting that its success could hinge on maintaining a narrow focus on the bill's scope. This strategic angle could frame the bill not only as a stimulant for sector growth but predominantly as a public safety measure, reducing crime surrounding predominantly cash-based cannabis storefronts.

Despite the palpable barriers to legislative progress, there's an unshaken optimism among cannabis industry proponents. They foresee that, rather than a single sweeping change, a succession of smaller, impactful advancements will generate a dynamic progression within the sector.

Ahrens' confidence in the industry's prospects is buoyed by the sustained popularity and increasing legalization of cannabis products. Currently, a growing composition of states—24 in total—alongside two territories and the District of Columbia, have opened their doors to the recreational use of cannabis.

Celebrating 4/20: A Testament to Sector Popularity

The 4/20 holiday this year particularly highlights the surging appeal of the cannabis market. Bloomberg Intelligence analyst Kenneth Shea proclaims Saturdays—as by tradition, a day for consumer exploration and indulgence in cannabis—as particularly lucrative. Market data from BDSA reveals that average sales on Saturdays in 2023 were elevated by 14% compared to the average of other days.

Ahrens concludes with a poignant vision of the "domino effect" or "snowball effect," an allegory evoking the infectious nature of market sentiment, which could precipitate rapid and substantial growth across the cannabis industry.

The flickering flames of hope among investors, guided by the anticipation of legal reform, are setting the stage for what could be an invigorated era for the cannabis market. As the countdown to 4/20 unwinds, the industry stands at the precipice of potential transformation—a beacon for those with a keen eye locked on the long-term harvest of green.

The full extent of the article's content and detail can be found at Bloomberg under the article titled "Floundering Weed Stocks Test Wall Street’s Faith in 2024 Rebound".

Against a backdrop of innovation and changing public perception, the ability of investors to navigate through waves of regulation and market volatility will test the mettle of even the most fervent cannabis bulls. Yet, this is a space in which the bold might find long-sought reward—that is if the DEA moves towards the new age of recognition and acceptance.

The cannabis sector's apparent spring presents amidst still concrete barriers, a canvas upon which the hopes of investors and the realities of federal regulation will continue to color the potential of this controversial yet increasingly embraced industry.

©2024 Bloomberg L.P. The insights and analysis provided reflect the depth of research and understanding of the financial landscape surrounding the cannabis sector. For more information on related content, visit Bloomberg, a premier source for business and financial market news.