This analysis was originally published on Cannabis Stock Trades on January 7, 2021.
2020 turned out to be an incredible year for cannabis stocks.
After falling sharply in 2019, the sector was hit hard again in the spring when COVID-19 ravaged global markets. Cannabis stocks and sentiment hit a multi-year low, and many cannabis investors threw in the towel.
It was a dark time for cannabis stocks. Take a look at the steep decline in 2019 and early 2020 in the chart below.
Wall Street has seen it a thousand times. This extreme pessimism usually sets the stage for an enormous rally. And that’s exactly what happened.
After hitting a multi-year low in March with the broader stock market, cannabis stocks went on a huge rally for the rest of the year.
- Green Thumb Industries (GTBIF) gained 167% in 2020 and jumped more than 500% from the 52-week low.
- Cresco Labs (CRLBF) gained 52% in 2020 and jumped more than 400% from the 52-week low.
- Innovative Industrial Properties (IIPR) gained 149% in 2020 and jumped more than 300% from the 52-week low.
There were a few reasons cannabis stocks rallied so hard.
- The sector was extremely oversold after steep losses in 2019 and 2020.
- The sector was extremely undervalued after delivering huge sales growth.
- Most U.S. states gave the cannabis industry an essential designation that allowed the industry to continue operating.
- Wall Street learned that the cannabis industry is recession-proof after sales hit a new all-time high during the biggest economic contraction in U.S. history.
- Five more U.S. states voted to legalize cannabis in November.
3 Profit Triggers for Cannabis Stocks in 2021
Naturally, after an incredible performance in 2020, investors want to know what to expect in 2021.
I see a high probability that they will deliver more gains in 2021 – because of three powerful catalysts directly on the horizon.
#1 – Cannabis Stocks Have Major Upward Momentum
The cannabis sector has strong upward momentum right now and this is a bullish signal for more potential gains. Here are some more details from Reuters.
In prior bull markets, when the S&P 500 takes out its previous bull market high, the index has experienced a median gain of 38% over the span of 26 months before topping out, according to Bespoke Investment Group data.
Many cannabis stocks hit new all-time highs in the last three months and historical data on the S&P 500 demonstrates that this frequently leads to more gains in the next two years.
#2 – 7 More U.S. States Could Be Going Legal in 2021
Five more U.S. states voted to legalize cannabis in November. This alone is a huge catalyst for these stocks in 2021.
However, it gets even better. It looks like up to seven more U.S. states could be legalizing in 2021. That includes huge potential markets in New York and Pennsylvania.
#3 – Democratic President and Congress Should Advance Legislation
New Democratic President, Joe Biden, isn’t considered to be a big advocate of legalization. Nonetheless, I think this argument misses the point. With the Democrats taking the presidency, the House, and the Senate, I see a high probability of major cannabis reform in 2021.
Cannabis Stocks Prepared to Rally Again in 2021
2020 turned out to be an incredible year for the cannabis sector.
After hitting a new multi-year low in March, cannabis stocks launched a huge rally and spent the rest of the year charging higher.
Looking forward, the stage is set for more gains in 2021. The U.S. cannabis industry should benefit from a string of powerful catalysts.
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Michael Vodicka owns shares of Cresco Labs (CRLBF) and Green Thumb Industries (GTBIF) and Curaleaf Holdings (CURLF).
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