Cannabis Stocks 2021: Will U.S. Legalization Spark a Bull Market?

The prospect of legalization in the United States has sparked a run for cannabis stocks that may lead to a prolonged bull market.

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Canadians were forced to hunker down for most of 2020 in the face of a devastating global pandemic. Alcohol and cannabis consumption rose in comparison to previous years. When new restrictions and lockdowns sprouted in March 2020, I’d discussed whether cannabis stocks could benefit from this new environment. Sales spiked in the spring months across Canada, but a second wind for cannabis stocks failed to materialize.

I’m going to discuss the recent run for equities in the cannabis space. New developments may lead to a bull run for cannabis in 2021. Today, I want to discuss some of those factors and determine whether investors should jump back into this volatile space.

Why cannabis stocks are picking up momentum

In the lead up to the United States presidential election, I was bearish on cannabis stocks. Incumbent Donald Trump had been ambivalent on the question of federal legalization during his reign. Now President-Elect Joe Biden was historically against cannabis legalization. Of course, politicians are known to change their stances when it is expedient. John Boehner, the former Republican Speaker of the House, was ardently anti-cannabis during most of his political career. Now, he’s a stern advocate and sits on the board of Acreage Holdings, a New York-based cannabis company.

Biden has significantly softened his rhetoric on cannabis. He has cast his support for medical cannabis legalization. There is widespread support for a legalization push among the Democrats. The path to legalization is now open with the Democrats winning a majority in the U.S. Senate.

Is U.S. legalization on the horizon?

There are still obstacles to cannabis legalization in the United States. Democrats will have their hands full tackling the ongoing COVID-19 pandemic as well as a devastated economy. Moreover, the fallout from the election has strained America’s social fabric. This could put cannabis legalization on the backburner in 2021.

Still, there is a lot of optimism for cannabis’ industry leaders. Canopy Growth (TSX:WEED)(NYSE:CGC) CEO David Klein recently predicted that the cannabis giant will be operating in the United States in roughly a year. The company’s shrewd partnership with Acreage back in 2019 meant that it would have a significant leg up on its peers. Shares have climbed 22% in 2021 as of close on January 8. The stock has increased 65% over the past three months.

Two cannabis stocks to watch in 2021

Canopy Growth is a no-brainer as far as cannabis stocks go. The U.S. market is nine times the size of its Canadian counterpart. This means that Canopy will turn nearly all its attention to our southern neighbour. Moreover, Canada’s legalization push has not been the friendliest to private enterprise. Provincial plans often differed greatly, and some political leaders worked to hamstring retailers. This led to a chaotic and disappointing rollout.

Aurora Cannabis (TSX:ACB)(NYSE:ACB) is also positioned to benefit from U.S. legalization. The company swung for big acquisitions before Canada’s official legalization date. A shortage has transitioned to a supply glut, which has been bad news for Aurora’s bid to outproduce its competitors. It hopes that access to the gigantic U.S. market will provide the boost this cannabis stock sorely needs.

Shares of Aurora have increased 19% in 2021. The stock has shot up 88% in a three-month span. Canopy has a distinct advantage with its Acreage and Constellation Brands partnerships, but U.S. legalization is still very good news for Aurora. The next year could see a second boom for cannabis stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands.

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