Cannabis: One Stock to Play the Movement

Key Points

• The Amplify Alternative Harvest ETF has 30 holdings in cannabis stocks, providing investors with diversification within the industry.
• Cannabis stocks have been making headlines due to the April 1, 2024, legalization of cannabis in Germany.
• The U.S. Department of Health and Human Services (HHS) has recommended the DEA consider reclassifying cannabis to a Schedule III drug down from a Schedule I drug, which currently carries a maximum prison sentence of 20 years to life.

Cannabis legalization is making headlines again. On April 1, 2024, Germany is the latest nation to legalize or, to be more specific, decriminalize cannabis for recreational and medical use. Canada has been one of the first nations to decriminalize cannabis widely and is one of the largest markets for legal marijuana. The United States Health and Human Services (HHS) department has recommended that the Drug Enforcement Agency (DEA) be reclassified from its current Schedule I drug status. Cannabis stocks fall into the consumer discretionary sector.

The DEA Claims to Hold All the Cards.

All publicly traded cannabis producers and product companies are waiting with bated breath for the United States to legalize cannabis federally. The DEA emphatically states that they are the ones with final authority on the matter to schedule, reschedule or even de-schedule the drug. 

Reclassification in Not Legalization

While HHS, along with 31 lawmakers, has recommended to the DEA to reclassify cannabis from a Schedule I to a Schedule III drug, it doesn't make it completely legal.

To review, Schedule I drugs are classified as those with a high potential for abuse with no currently accepted medical use, which include heroin, LSD, MDMA and cannabis. Maximum penalties for distribution range from 20 years to life in prison.

Schedule II drugs are those with a high potential for above with some currently accepted medical use, including Oxycodone, Vicodin, fentanyl, cocaine, Adderall and methamphetamine. Maximum penalties range from 5 to 40 years in prison.

Schedule III drugs are those with moderate to low potential for abuse and some currently accepted medical use. These drugs include codeine, ketamine, testosterone and anabolic steroids. Maximum penalties can range from 10 to 20 years in prison.

While these are federal classifications, states may have more lenient or stricter penalties. Based on federal classification, Schedule III drugs can still carry prison sentences based on the trafficking intent and quantity of possession, which underscores the fact that reclassification is most definitely not legalization.  

The Current and Changing State of Legalization

As of April 7, 2024, an estimated 24 states and the District of Columbia have legalized recreational cannabis usage. The latest states to legalize recreational marijuana are Virginia, Ohio and Minnesota. Commercial sales for Washington and Virginia have not been rolled out yet. Worldwide, recreational cannabis use has been decriminalized in Thailand, Mexico, South Africa, Malta, Luxembourg and parts of Australia.

The One ETF to Play the Cannabis Movement

Cannabis investors haven't been the most successful, as most of these stocks collapsed by 2023. While you could invest in a few cannabis names, which could have been very unfortunate in 2021, you can spread your risk in 30 names through the Amplify Alternative Harvest ETF NYSEARCA: MJ.

Top 4 Holdings

The MJ ETF has 30 holdings in the cannabis sector, ranging from producers and product makers to REITs involved in the industry. Aside from a 41.58% weighting of its MJUS ETF, its largest company holding is Tilray Brands Inc. NASDAQ: TLRY, with 10.64 million shares representing a 9.43% weighting. Canopy Growth Co. NASDAQ: CGC is its second largest holding with 2.5 million shares, representing an 8.75% weighting. With 150 retail locations in Canada, SNDL Inc. NASDAQ: SNDL is the third largest, holding 9.1 million shares or 6.85% weighting. Rounding out the top 4 companies is Cronos Group Inc. NASDAQ: CRON with 6.6 million shares or a 6.04% weighting. Having 30 different holdings prevents being overly concentrated in a single name and not having to select which stocks to hold.

Daily Cup Pattern

The daily candlestick chart on MJ illustrates a cup pattern. The cup lip line formed at $4.52 on September 15, 2023, as shares fell to a low of $2.56 on October 30, 2023. MJ staged a rally on the daily market structure low (MSL) trigger breakout through $2.79 as it rose to a peak of $3.92 on February 5, 2024, before falling back to $3.04. MJ staged a sharp rally into the April 1, 2024, legalization of cannabis in Germany to retest the cup lip line. The daily relative strength index (RSI) is chopping just under the 60-band. Pullback support levels are at $3.92, $2.41, $3.04 and $2.56.