U.S. cannabis reforms could send pot stocks higher

Although cannabis remains illegal in the U.S. federally, there are now 23 states where adult-use cannabis has been legalized. Ohio and Pennsylvania are the next states expected to allow adult-use cannabis, while Florida could do so in two to three years, one analyst says.. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know.

Given their depressed valuations, U.S. cannabis stocks can be a buying opportunity “with the caveat that they are extremely volatile in the short term,” says Mr. Ahrens, who runs the actively managed AdvisorShares Pure U.S. Cannabis ETF “We feel strongly that things have been co-ordinated behind the scenes – that the HHS wouldn’t put that letter out unless it was already co-ordinated that the DEA was going to approve it,” Mr. Ahrens says.

Still, the reclassification of marijuana is expected to have a bigger impact than the banking bill as it would also allow cannabis companies to write off business expenses – a move that would boost cash flow and profits.Nawan Butt, portfolio manager with Toronto-based Purpose Investments Inc., agrees that rescheduling is key and “would probably be the biggest news in cannabis since its legalization in Canada.

But U.S. cannabis is still a “very bullish space” based on the growth opportunity, he says. “If we look at the total addressable market, we have gone from 18 states where there is legalized adult-use cannabis to 23 states in the past four years.” Mr. Butt’s fund is now 90 per cent invested in U.S. cannabis names with the rest in Europe. He has almost no exposure to the struggling Canadian cannabis market.

Bruce Campbell, founder and portfolio manager with Kelowna, B.C.-based StoneCastle Investment Management Inc., is also upbeat on the potential for U.S. cannabis stocks but remains cautious.

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