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Pot Stocks Plunge as U.S. Legalization Efforts Wane

· Nov 19, 2021
The largest fund tracking the pot industry, the ETFMG Alternative Harvest ETF (ticker MJ), is at its lowest price since November 2020 and is down 60% from its Feb. 10 high. Only three of the f ...

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Cannabis stocks headed for their worst week since the height of pandemic fears in March 2020 as the glacial pace of national legalization efforts in the U.S. has investors doubting it will happen anytime soon. 

The largest fund tracking the pot industry, the ETFMG Alternative Harvest ETF (ticker MJ), is at its lowest price since November 2020 and is down 60% from its Feb. 10 high. Only three of the fund’s 36 holdings are higher this week. Canada’s Canopy Growth Corp. is down 19% in the last five days, Cronos Group Inc. has sunk 21% and Tilray Inc. has dropped 15%.

While the ETFMG ETF is dominated by Canadian cannabis companies, U.S. pot stocks are lagging as well. The Horizons US Marijuana Index ETF (ticker HMUS) has dropped 12% this week and 54% since its 52-week high on Feb. 10.

The global cannabis market’s growth hinges on legalization in the U.S. But that kind of regulatory change is unlikely to happen under the Biden administration, Barclays analysts wrote in a note to clients on Thursday. In addition, Canadian cannabis companies will struggle to compete with U.S. multistate operators, Barclays wrote.

On Monday, Republican Congresswoman Nancy Mace released draft legislation for a cannabis bill. But the bill is unlikely to become law in a Democratically controlled House, Cowen analyst Jaret Seiberg wrote in a note.

With waning buzz around the bill, investors are pulling back from pot stocks. Even though Mace’s bill may fall short, there is still a “narrow” opportunity for U.S. legalization to make some progress after the U.S. midterms, according to Azer. But investors should avoid jumping into pot based on the ebs and flows of drawn-out legislative timelines that could continue to weigh on the sector heading into next year, she said.

“It’s the natural unwinding of irrational retail investor exuberance around regulatory headlines out of Washington D.C.,” Azer said in an interview. “We’ve been clear in saying that that piece of legislation is not going to see the light of day.”