Optimism surrounding timely U.S. federal cannabis legalization by Democrats in Washington has faded throughout 2021, and so too have early-year gains among many popular cannabis stocks. In fact, the ETFMG Alternative Harvest ETF (NYSE:MJ), which was once up more than 120% year-to-date, recently crossed over to a negative return for the year.
Despite the recent weakness, Cantor Fitzgerald cannabis analyst Pablo Zuanic said Wednesday that he still likes the setup for U.S. multi-state cannabis operators ahead of potential stock uplistings to major U.S. exchanges.
Potential Reform Compromise? Earlier this month, Senator Elizabeth Warren and Senator Cory Booker sent a letter to the Department of Justice urging it to decriminalize cannabis. The letter contained a deadline for action of Oct. 20.
On Wednesday, Zuanic said he believes Democrats are willing to compromise on cannabis reform, potentially settling for federal decriminalization rather than legalization.
Meanwhile, the business fundamentals for U.S. MSO stocks continue to improve, while the stocks have collectively lost about half their value since February peaks.
Institutional Buying Power: Since MSOs are not allowed to trade on major exchanges like the Nasdaq and the NYSE and technically run federally illegal businesses, most institutional investors will not touch them. In fact, retail investors currently account for about 95% of MSOs free float, Zuanic said.
However, he said there are several ways the path could be cleared for U.S. MSOs to uplist to major exchanges, potentially opening the door for major institutional buying.
“Yes, we consider this a good entry point, and would expect the entire US group to trade up, if our thesis is proven correct,” Zuanic said.
He added that institutional investors will likely be more discerning than retail traders, suggesting MSO stock selection may be more important moving forward.
Benzinga’s Take: Cannabis investors should have learned by now that any kind of legislative progress in Washington is always excruciatingly slower than it should be. In the meantime, cannabis stocks will likely continue to be extremely volatile, and long-term investors should take a diversified approach to the space to help mitigate risk.