Cannabis Stocks: A Contrarian Bet on America’s Most Battle-Tested Industry

When an entire sector collapses 80-90% from its highs, most investors run for the exits. But contrarian investors see something different: a rare opportunity to buy distressed businesses in a high-growth industry trading like call options.

Cannabis stocks have been decimated. Companies that soared during the pandemic lockdowns have crashed back to earth, leaving most investors wanting nothing to do with the sector. But this is precisely when contrarian investors should pay attention—especially with potential catalysts on the horizon that could fundamentally reshape the industry’s economics.

The Brutal Reality of Cannabis Stock Performance

The numbers are staggering. Since their peaks during the lockdown period, cannabis stocks have fallen an average of 80-90%. Much of this carnage occurred over just the past 12 months, with many companies down 70-80% in that timeframe alone. This isn’t a minor correction. It’s complete devastation that has driven away institutional investors and left retail shareholders nursing massive losses.

It’s the last thing anyone wants to talk about after losing 90% of their money. No one wants to hear anything about cannabis. No one’s going to double down. It’s just human nature.

Yet this human tendency to avoid painful topics creates exactly the kind of market inefficiency that value investors seek. The question isn’t whether these stocks have been destroyed—they obviously have. The question is whether the underlying industry justifies such extreme pessimism.

A $30 Billion Industry Operating Under Impossible Constraints

Despite the stock market carnage, cannabis remains a substantial and growing business. US sales reached approximately $30 billion last year. To put that in perspective, Canada’s legal cannabis market generated around $5 billion, but when adjusted for population differences, that’s equivalent to roughly $40 billion in US market terms. Alcohol generates over $100 billion in annual sales, while tobacco sits around $85 billion.

The cannabis industry has room to grow. Forecasts for 2025 range from $35-45 billion in sales, representing continued double-digit growth despite operating under constraints that would cripple most businesses.

Currently, approximately 40 states have legalized cannabis in some form, with about 24 states plus Washington DC allowing recreational use. From a population perspective, roughly 75% of Americans have access to medical cannabis, while over 50% have access to recreational cannabis. The social acceptance has grown dramatically—grandparents who never considered cannabis now use THC-based topical products for conditions like joint pain.

Major beverage companies have noted in earnings reports that declining traditional alcohol sales are partially attributable to consumers shifting to legal cannabis. This isn’t a fringe market. It’s becoming mainstream.

Three Crushing Operational Burdens

What makes the cannabis sector’s survival remarkable is that these companies operate under three massive handicaps that would destroy most industries.

The Tax Burden: Under Section 280E of the IRS code, cannabis companies can only deduct the cost of inventory. They cannot deduct standard business expenses like payroll, rent, or utilities. This means they’re effectively taxed on their gross margins rather than net income—a punishing rate that no other legal industry faces. The absurdity is striking: companies can deduct costs for a federally illegal product but not for legal operating expenses.

Interstate Commerce Restrictions: Cannabis companies cannot operate across state lines. Consider what this means: no other major industry in America functions under such constraints. Banking faced similar restrictions under the McFadden Act of 1927, which prevented banks from branching across state lines. That law created dangerous portfolio concentration—Illinois banks became overexposed to farmland and manufacturing because they couldn’t diversify geographically. The restriction was eventually lifted because it was economically destructive.

For cannabis, these barriers create profound inefficiencies. Companies must operate greenhouses in every state where they do business. Eventually, Kentucky and Virginia should be growing cannabis in open fields—just as they once grew tobacco—becoming low-cost providers for the entire country. Instead, the industry is forced into a fragmented, expensive production model that makes no economic sense.

When interstate commerce becomes legal, the transformation will be dramatic. One cultivation center could service five or more states. Online distribution—which already exists for hemp-derived products under the 2018 Farm Act—would expand to standard cannabis products. The entire supply chain would rationalize.

Capital Access Problems: Growing businesses require capital for working capital needs and expansion. Cannabis companies are either locked out of capital markets entirely or face onerous terms. A survey of announced debt deals for public cannabis companies reveals interest rates commonly exceeding 10%, often with additional restrictive covenants and equity kickers.

The banking situation is even worse. Nationally chartered banks won’t lend to cannabis companies. They won’t even lend to real estate companies if those properties have cannabis tenants. Some companies can access credit unions or regional banks, but access to mainstream financial services remains severely limited.

The very fact that this industry exists, the very fact that it’s at $30 billion in sales, is a testament to its resilience and potential. These are battle-tested businesses that have survived conditions that would bankrupt most companies.

What Current Valuations Look Like

Among the 10-12 major public cannabis companies operating on Canadian and American exchanges, valuations have become interesting. Most trade below one times sales—a price-to-sales ratio that would be considered cheap in most growth industries. These companies generally achieve profitability at the gross margin level and maintain reasonable liquidity.

There are solvency concerns and negative cash flow issues at many companies, but from a high-level valuation perspective, the sector doesn’t look catastrophic relative to its operational reality. The stocks have been priced for extinction while the underlying businesses continue generating billions in revenue.

Two Potential Catalysts on the Horizon

Two developments could dramatically alter the investment landscape for cannabis.

Rescheduling: In October 2022, the Biden administration directed the DEA and Department of Homeland Security to examine rescheduling cannabis. Currently, cannabis sits on Schedule I alongside heroin, classified as having no medical value and high addiction potential. Meanwhile, cocaine and methamphetamine occupy Schedule II—a lower classification despite being demonstrably more dangerous.

The rescheduling process has stalled. A hearing scheduled for January never occurred. However, the current administration could potentially accelerate the process. President Trump discussed cannabis reform on the campaign trail and has shown willingness to bypass bureaucratic procedures when he wants action.

At any given moment, a presidential directive could order the DEA to reschedule cannabis immediately. While the proper process involves extensive stakeholder consultation, the administration has shown willingness to move quickly on other regulatory changes, as evidenced by recent action on digital assets through the GENIUS Act.

True rescheduling—ideally removing cannabis from the controlled substances schedule entirely or at minimum dropping it to a much lower classification—would immediately improve margins for these companies by eliminating the Section 280E tax penalty.

The SAFER Act: The Secure and Fair Enforcement Regulation (SAFER) Banking Act represents the newest iteration of cannabis banking legislation. This bill, currently in the Senate after passing out of committee in 2023, would provide legal immunity to banks that choose to serve cannabis companies.

The SAFER Act wouldn’t mandate that banks serve cannabis businesses, but it would remove the federal legal barriers preventing them from doing so. This would open access to traditional banking services, business loans at reasonable rates, and ultimately lower the cost of capital across the sector.

Both political parties have shown general consensus that cannabis policy needs reform. With 40 states having already legalized in some form, federal policy would essentially be acknowledging existing reality rather than pushing through a controversial agenda. Seventy-five percent of Americans already have legal access to cannabis in their states.

Investment Considerations and Risks

Cannabis stocks function as call options on a high-growth industry populated by distressed companies. When stocks have fallen 90% and aren’t facing imminent bankruptcy, the asymmetric risk-reward profile becomes compelling—especially with identifiable catalysts that could trigger revaluation.

To illustrate the upside potential: if these stocks merely returned to their 52-week highs from current levels, investors would see returns of 2-6 times their money depending on the specific stock. That’s how dramatically the sector has collapsed in recent months.

However, this isn’t a six-month trade. The timeline for regulatory change remains uncertain. It could happen quickly if the administration decides to act, or it could drag on for another year or more. Traditional security analysis doesn’t work well for most cannabis companies because many generate negative cash flow despite reasonable revenue and gross margins.

Investors should focus on market leaders with established brands rather than attempting to pick specific winners. The competitive landscape will transform dramatically once regulatory barriers fall. Companies that haven’t had to compete on traditional retail fundamentals—branding, customer experience, operational efficiency—will face new challenges.

Early tours of cannabis retail locations in Colorado around 2016, roughly four years after recreational legalization, revealed businesses that clearly had never operated professional retail operations. The spacing was poor, displays were inadequate, and inventory presentation resembled outdated Eastern European stores with bare shelves. That has changed considerably as the industry has matured, but full federal legalization will bring entirely new competitive pressures.

Consolidation seems likely once regulatory changes improve valuations and provide these companies with currency (their stock) to acquire competitors. Major tobacco and alcohol companies have already made investments in the space and will likely increase involvement once federal barriers fall. Those Kentucky and Virginia tobacco fields could look very different in a few years.

Beyond traditional cannabis companies, the sector touches adjacent industries. Beverage companies are incorporating THC into drinks as traditional beer consumption declines. Pharmaceutical and wellness companies are developing topical agents for muscle soreness and other conditions. Doctors who currently can’t officially recommend cannabis products will begin doing so once federal rescheduling occurs.

A Sector Worth Monitoring

Most registered investment advisors aren’t recommending cannabis stocks to clients. Many retail brokerage platforms maintain blanket bans on purchasing these securities regardless of account type or investor sophistication. Investors who bought during the previous hype cycle and lost 90% want nothing to do with the sector.

This combination of factors—regulatory barriers, operational challenges, catastrophic stock performance, and widespread investor aversion—creates the classic setup for contrarian investment. The industry continues growing despite impossible operating conditions. Potential catalysts exist that could remove major impediments. And valuations reflect extreme pessimism.

The Timeline Question

Whether regulatory catalysts materialize this year or take longer remains uncertain. The setup period is happening right now. Cannabis policy has become a quagmire of special interests, bureaucratic procedures, and political considerations extending beyond simple economic or scientific assessment. Issues around criminal justice—the thousands of people incarcerated for cannabis possession that would become legal—add complexity to the political calculation.

Yet momentum exists. The federal government would be acknowledging a fact rather than pushing through an agenda. Three-quarters of Americans already have access to cannabis. The current federal classification contradicts both scientific evidence about the drug’s medical utility and addiction potential, and the lived reality in 40 states.

For investors willing to take a long-term view on a battle-tested industry trading at distressed prices, cannabis stocks represent an asymmetric opportunity that warrants serious consideration. The risk is real—but so is the potential reward if America’s patchwork state-by-state legalization finally receives federal acknowledgment. When something is beaten down 90% in a high-growth industry, it functions as a call option. And there aren’t many better places to find that combination of distress and potential than cannabis stocks today.