If pot is legalized, institutional investors could pour into cannabis stocks

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If or when lawmakers legalize cannabis at the federal level, institutional investors could rush to get into pot stocks, according to one analyst. Democratic lawmakers issued a joint statement in January saying they would push for comprehensive marijuana reform this year.

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Lawmakers push for cannabis reform

They plan to release draft legislation "in the early part of this year." The first quarter is nearly over, so if that statement was accurate, we could see legislation not long after Congress passes the stimulus bill that's back before the House of Representatives.

In a recent report, Jefferies analyst Owen Bennett noted that the House passed the MORE Act in December, but then-Senate Majority Leader Mitch McConnel refused to let the bill go up for debate. Bennett added that marijuana legalization has "overwhelming public bipartisan support" and that many Republican states have already legalized the drug.

Schumer also said the bill they were working on already had some Republican support. Bennett sees a good chance that a cannabis reform bill will advance to President Joe Biden's desk. He also noted that Biden has previously been against full legalization, but he does support allowing the states to decide. It seems likely that any bill that comes out of Congress would take that form.

Institutional investors could rush into cannabis stocks

Bennett noted that if cannabis is legalized at the federal level, it could allow U.S. cannabis companies to up-list onto a major exchange and gain full access to the capital markets. The move would also enable institutional investors to get into cannabis stocks. All of these things have bee prevented so far due to marijuana's legal status.

Bennett also believes there could be a "huge inflow" of institutional money into cannabis stocks if legalization occurs. He noted that ownership of pot stocks is heavily skewed toward retail investors for a few reasons. Some institutions can't invest in U.S. cannabis stocks because they're not on the exchange. Even if the exchange isn't a factor, other institutions can't invest in them because clearinghouses won't settle the trades due to money laundering concerns.

Still other institutional investors won't invest in cannabis stocks because the drug is still illegal at the federal level, and they're concerned about their reputation or prosecution. Bennett expects legalization to drive cannabis stocks much higher due to an inflow of money from institutional investors.