Big name cannabis stocks sink after more states legalize

The largest cannabis stocks saw their share prices drop significantly on Wednesday, after more states legalized recreational and medical marijuana use and Biden, who has vowed to decriminalize marijuana if elected, moved closer to being declared the winner of the U.S. presidential election.

Driving the news: Arizona, Montana, New Jersey and South Dakota voted to legalize marijuana on Tuesday, joining 11 other states and Washington, D.C.

• “These state-level victories will mean tens of thousands of fewer arrests and new jobs, much-needed tax revenue and increased public safety,” Aaron Smith, CEO of the National Cannabis Industry Association, said in a press release.
• “There is still a lot of work to do, but the wind is at our backs.”

By the numbers: Companies such as Canopy Growth, Aurora Cannabis, Tilray, and Cronos all saw declines of at least 8% Wednesday. Marijuana ETFs also tumbled, including...

• The $600 million ETFMG Alternative Harvest ETF (MJ) by more than 3%.
• The AdvisorShares Pure Cannabis ETF (YOLO) by 0.65%.
• The Cannabis ETF (THCX) by 2.8%.
• The Global X Cannabis ETF (POTX) by 4.2%.

What's happening: While the poor performance of the sector's big names left many scratching their heads, it may be a case of the still-nascent U.S.-based marijuana industry getting a boost.

• The AdvisorShares Pure U.S. Cannabis ETF (MSOS), which holds only U.S. companies, closed 1% higher, having gained as much as 2% during the trading day.
• Its shares have risen 28.5% since Sept. 24.

Between the lines: Because cannabis remains illegal on a federal level, the U.S. lacks for large publicly traded companies.

• Most investors seeking to bet on industry growth have had to invest in proxies like Constellation Brands, which is mainly a purveyor of alcoholic beverages, or companies like Aurora and Tilray that are headquartered in Canada.
• The Pure U.S. Cannabis ETF includes stocks from less known mid-, small- and micro-cap companies like GreenThumb Industries and Curaleaf Holdings through total return swap contracts.
• Some holdings focus on areas such as REITs, health care, cannabidiol (CBD), pharmaceutical and hydroponics.

What's next: Legalization advocates had hoped for a Democratic blue wave that would pave the way for nationwide decriminalization or at least the removal of cannabis as a Schedule 1 narcotic.

• But there may still be a path as many states represented by Republicans have passed popular ballot initiatives legalizing cannabis for recreational use, including South Dakota, where Sen. John Thune is the No. 2 Republican in the chamber.
• 53% of voters in Thune's state supported recreational cannabis and 69% of the electorate embraced medical marijuana.