Stocks are off across the board, but the cannabis industry is bucking the trend in a big way. This past week, Green Organic Dutchman (TSXV: TGOD) was up nearly 70% on heavy buying, after the company announced its market value was now over $2 billion. That’s a newly-minted Canadian record for a publicly traded company, which says a lot for a sector still in its infancy.
If you’ve been looking for high-quality, inexpensive cannabis stocks lately, you’ve probably found a lot of them. In fact, the market has been dominated by a handful of companies that have fallen by 20% or more, due to a number of factors. With all of these declines happening in quick succession, you might be wondering if they are indicative of an impending correction.
For investors who love bargains, now is a good time to take a fresh look at cannabis stocks. After an incredible 12-month rise from March 2020 to February 2021, cannabis stocks have entered a bear market, defined as a decline of 20% or more from their 52-week high. The Advisors Shares Pure U.S. Cannabis ETF (MSOS) is down 21% from its 52-week high in mid-February. Look at the 6-month chart below – you can see the all-time high in February and the recent decline.
2 Factors affecting cannabis stocks
I see two main factors for the recent decline.
Revenue decreases after huge growth in last 12 months
From March 2020 to February 2021, cannabis stocks experienced incredible growth. For example, the US market leader in cannabis, Curaleaf Holdings (CURLF), grew by 600% during this period. After strong growth, it is normal for traders and short-term investors to take profits. That’s what has been happening in the cannabis industry over the past few weeks and what has caused the recent decline.
Washington impasse creates uncertainty over legalization
When the Democrats won the presidency, the House of Representatives, and the Senate, optimism arose that federal legalization was possible. While legalization at the federal level still seems inevitable, it may take longer than expected. The reason is the gridlock in Washington. For example, the COVID-19 stimulus bill did not receive a single Republican vote. Although Republicans are increasingly supportive of legalization, the lack of cooperation in the COVID-19 bill makes cannabis investors and analysts nervous, since federal legalization won’t happen until 2021.
4 reasons to be optimistic about cannabis values
However, this weakness appears to be temporary. Looking ahead, I expect cannabis stocks to rise in 2021 with four strong catalysts on the horizon.
Cannabis sales are exploding in the United States
The cannabis industry is booming in the United States. Leading companies in the industry are reporting incredible sales increases. Curaleaf, for example, recently reported amazing annual results, including 200% revenue growth over 2019. What other sector is currently experiencing similar growth? I don’t know of any, especially in the era of COVID that has affected so many industries.
7 other US states may become legal in the next 12 months
The cannabis industry in the US is expected to grow even faster in the future. A number of U.S. states plan to legalize drugs over the next 12 months to offset the loss of tax revenue due to COVID. This list includes New York, Pennsylvania and Virginia.
Congress must pass cannabis legislation by 2021
While legalization at the federal level may take longer than expected, I remain convinced that there is a good chance of major reform in 2021. There are numerous cannabis bills currently pending in Congress. These include the SAFE Act and the MORE Act. Both bills would represent significant reform and would be an important catalyst for the growth of the industry.
Upward trend in cannabis stocks
Despite recent weakness, the cannabis sector remains in an upward trend. I think the cannabis sector formed a long-term bottom in March 2020 and is still in the early stages of a long-term upward trend.
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The cannabis sector has just entered a declining market, defined as a 20% drop from its 52-week high. Despite recent weakness, I remain optimistic about cannabis stocks, with four strong catalysts ahead. I see this weakness as temporary and an opportunity for new capital to enter the sector. See what’s in our model portfolio and get our trade alerts! Best,Michael Water Editor, Cannabis Effects Trading
About the author and cannabis stock trading
Michael Wodicka is an equity analyst with over 20 years of trading and investment experience. His research has received attention in some of the industry’s most respected publications. He has been investing and managing investors in the cannabis sector since 2013. 
Mr. Vodicka offers his experience and advice to Cannabis Stock Trades members. Sign up for Cannabis Stock Trades and receive exclusive analysis from Mr. Water, trade alerts and a sample portfolio.
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