Amid federal delays, can marijuana companies break their slump?

Even if the federal government does legalize marijuana, it’s not clear how much demand there will be. In some states that have legalized recreational cannabis use and sales, this has been a boon for business owners: Colorado saw $135 million in retail pot sales last year. But many companies are struggling to meet consumers’ needs as they scramble to open up shop without access to banking services or financing options

Is marijuana experiencing a’regulatory recession’?

More states, including New Jersey this month, are moving toward authorizing the sale of recreational cannabis, giving some analysts confidence that the recent slump in publicly listed marijuana businesses may come to an end. 

It’s been quite a rut. The shares of Curaleaf Holdings, Green Thumb Industries and Trulieve Cannabis have plummeted more than 30% this year — much worse than the declines posted by benchmark indexes such as the S&P 500 and Dow Jones Industrial Average. Much of cannabis companies’ slide is due to the failure of reforms that investors had hoped for to materialize so far under U.S. President Joe Biden.

Given that equities still trade at low multiples to profits and several firms have had growth rates of 60%, BTIG analyst Camilo Lyon calls it a “regulatory recession.”

“If there was any question about the category’s demand profile, one just had to visit an adult-use dispensary in New Jersey this past weekend to observe hourlong lineups of individuals waiting to purchase legal cannabis,” Lyon wrote in an April 26 research note. 

“Slow-moving legal reforms have forced cannabis into recession, with numerous federal and state regulatory prohibitions still in place.”

He is hopeful, though, that this will be resolved shortly. Lyon mentioned President Biden’s recent commute of 75 sentences for nonviolent drug crimes, as well as the chances for the SAFE Banking Act, which would enable financial institutions to provide banking services to legal cannabis firms without facing federal regulatory penalties. He also noted that a fresh group of states, including New York, Maryland, and Pennsylvania, are anticipated to legalize marijuana in the near future. 

To be sure, there are still a lot of roadblocks to overcome. Republicans are expected to retake control of at least one chamber of Congress this year, reducing the chances of federal change. On April 1, the House of Representatives approved the Marijuana Opportunity Reinvestment and Expungement Act for the second time, with just three Republicans voting in favor.

While Biden’s commutations have gotten a lot of attention, his drug czar’s policy also aims to limit cannabis usage. The administration’s first drug-control policy, the 152-page study, focuses mostly on harm reduction and addiction treatment. However, it also points out that marijuana usage among high school students was 36.8% in a poll, which is much higher than opiate use. It advocates for the extension of initiatives aimed at preventing teenage drug use.

Clearly, the federal government’s worries regarding marijuana legislation aren’t finished.

In an interview, Bloomberg Intelligence analyst Kenneth Shea remarked, “Decriminalization is extremely vital to this market.”

“And the can just continues rolling down the line.”