You’d struggle to find an industry that’s generated more robust returns than cannabis in recent months. The ETFMG Alternative Harvest ETF, a basket fund that contains an assortment of direct and ancillary marijuana stocks, is up 212% since the end of October (through Feb. 10).
Some individual pot stocks have performed multiple times better. Sundial Growers (NASDAQ:SNDL), Tilray (NASDAQ:TLRY), Aphria (NASDAQ:APHA), Aurora Cannabis (NYSE:ACB), and HEXO are up a respective 2,280%, 1,190%, 535%, 388%, and 341% since the end of October.
It begs the question: What are investors smoking?
Here’s why cannabis stocks are going “bong-kers”
In recent weeks, multiple factors have made pot stocks all the buzz.
To begin with, Democrats taking control of Congress and the Oval Office could bring about real federal cannabis reforms. During the previous administration, Republican Mitch McConnell repeatedly kept cannabis legislation from reaching the Senate floor as Senate Majority Leader. Now, as Senate Minority Leader, McConnell no longer holds the same power. New Senate Majority Leader Chuck Schumer has been clear that he intends to co-draft legislation to legalize marijuana in the U.S.
As a quick reminder, Gallup’s national sentiment poll on cannabis showed that an all-time record 68% of respondents in 2020 favored the idea of legalization. More specifically, 83% of self-identified Democrats want to wave the green flag on marijuana, compared to only 48% for self-identified Republicans.
Secondly, long-awaited consolidation is underway. In mid-December, Aphria and Tilray announced their intention to merge and create the largest cannabis company by annual sales. Combining these two businesses will result in tangible cost synergies, improved global reach, and a huge portfolio of derivatives (e.g., edibles, beverages, vapes, concentrates, oils, and topicals) that should boost overall operating margins.
Thirdly, the North American pot industry is exhibiting signs of maturity. Following its fiscal third-quarter earnings release, Canopy Growth (NASDAQ:CGC) announced that it will generate positive operating cash flow by fiscal 2023, along with positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the latter half of fiscal 2022. Meanwhile, many U.S. multistate operators are expected to turn the corner to recurring profitability in 2021.
Canadian pot stocks have entered “Bubble 2.0”
This probably all sounds great, but we’ve been here before. Canadian pot stocks have promised investors the moon in the past, only to disappoint them. Based on the share price appreciation we’ve witnessed in recent weeks, it seems like Canadian marijuana stocks are again about to harsh shareholders’ mellow.
As much as the polling suggests that the…
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