Pot Stocks Hang on Congress

Cannabis stocks have attracted investments well into the billions of dollars on expectations of future growth following imminent legalisation.
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The legislative agenda

The White House caused a bit of a stir a month ago by announcing that President Biden would pardon people convicted of possessing marijuana in an apparent move towards legalisation in what's expected to be the world's largest market. The announcement coinciding with the start of early voting in midterm elections raised speculation among pundits, as the recreational use of marijuana has gained traction in the American public, and there is a clear majority supporting it.

The Biden Administration also moved to start the process of introducing legislation to decriminalise recreational use. Since Congress is focused on reelection, changes might occur in the next legislative session. But it isn't a subject that generates much urgency among lawmakers, with the vast majority not including any mention of it in their campaigns. Although support is higher among Democrats, most Republicans also support legalisation, suggesting that no matter who wins the midterms, there isn't likely to be a severe obstacle.

Time for some ‘Growth’?

In Canada, where cannabis has been legal, listed companies have struggled to turn a profit, let alone be a stand-out investment. One of the components is, of course, a smaller market. But increased competition from an already saturated market has hampered growth. If the US follows Canada's legal path, does that mean US firms won't see an expected boom in sales?

Investors seem to disagree, with the prominent firms in the sector sporting a relatively high EV/Sales ratio, suggesting that there has been much betting on growth. However, there is a wide range of valuations for the sector, which allows investors to find hidden gems that can
benefit from a legal shift in Washington. One of the better-positioned players in the industry is Canopy Growth, which jumped 14% after US Senator Schumer said progress was being made on getting a bill through. Canopy has an equity partnership with Constellation Brands, which could accelerate its growth in the US.

In the end, whether legalisation makes it over the finish line will depend more on political calculus, which adds an extra risk factor for traders looking to buy into the sector.

Canopy 95% below record high

As disappointing as it sounds, the share price of Canopy Growth Corporation is 95% below its record high of C$ 67.75, and it offers a great R:R. After pulling a record low on July 14 at C$ 2.15, it trades sideways, resembling a rectangle bottom.

In the short term, the stock could spike up for a double top near C$ 4.30 and reverse. If the bottom succumbs to bearish pressure, the pattern might be validated. Otherwise, a triple bottom might be seen instead if the bulls fail to get past C$ 4.30 any other time.

The breakout outside the range brings C$ 6.45 and a dramatic C$ 0.00 in focus, being the height of the range.

Key takeaways

The US is moving towards legalising recreational marijuana, which has caused a boom in investment in cannabis stocks. However, given the Canadian market's struggle, it is unclear how profitable these investments will be. Canopy Growth is one of the better-positioned companies, but the industry's success will largely depend on politics.