Cannabis stocks have generally lost more than half their value this year, and Joe Biden's pardons last week didn't provide much sustained relief.
Getty ImagesCannabis stocks have come down from a spike after President Joe Biden’s surprise announcement last Thursday that he’s pardoning everyone convicted of simple marijuana possession under federal law, but if that executive action snowballs into more impactful legislation and reform, it could lead to a more lasting high.
Nasdaq-listed Canadian stocks like Canopy Growth Corp. (CGC) and Aurora Cannabis (ACB) both cratered on Friday and Monday. Canopy’s 36% loss in those two days more than erased its 22% gain on Thursday, Aurora is down 15% since trading began on Thursday, SNDL–formerly called Sundial Growers–is down 7.5%, and Tilray Brands has eked out a 3% gain from the roller-coaster three-day span. Analysts attribute the sobering retreat to profit-taking and the fact that these stocks are over-correlated with the broader market, which fell Friday and Monday following strong employment data, but think the decline may have been excessive.
“There’s nothing that Biden said that’s negative for Canopy or for Tilray that would justify those stocks being below where they were before Biden made the announcement,” says Cantor Fitzgerald managing director Pablo Zuanic. “These are just very liquid stocks that are high beta, so on risk-on days they go up and on risk-off days they go down.”
The ETFMG Alternative Harvest ETF (MJ) includes a basket of these Nasdaq-listed Canadian stocks and has $410 million in assets. It closed Monday lower than it closed last Wednesday before Biden’s announcement and is down 56% this year.
The AdvisorShares Pure U.S. Cannabis ETF (MSOS), now with $734 million in net assets, is populated by less liquid U.S. stocks traded over the counter and didn’t endure as much pain on Friday and Monday, but still receded more than the S&P 500 Index. The fund gained 34% on Thursday following Biden’s statement in the last hour of trading, but fell 9.5% Friday and Monday as the S&P declined 3.5%.
Chicago-based Green Thumb Industries (GTBIF) and Massachusetts-based dispensary Curaleaf (CURLF), the ETF’s largest holdings, are both still up more than 20% from where they started Thursday even after steep losses Monday.
The U.S. stocks may have sustained more of their gains thanks to Biden’s request to the Department of Health and Human Services and the Attorney General to review how marijuana is classified under federal law. It’s currently a Schedule I substance, the same classification as heroin, meaning companies selling it face strict tax regulations and aren’t allowed to make normal business deductions.
“If cannabis is descheduled, or it goes to Schedule III or IV, then the U.S. companies benefit because there's no more 280e tax rule that they have to pay taxes on gross profits,” Zuanic says. “That’s one argument why U.S. stocks have held up better than the Canadian stocks.”
The stringent regulations placed on cannabis companies have handicapped entrepreneurs in the industry from developing profitable businesses and frustrated investors for years, and the review process to reschedule it would likely take a year even in the best of circumstances, Zuanic says. The MSOS ETF is down 57% this year and 80% since its February 2021 peak. Where it goes next could come down to whether Biden’s announcement amounted to toothless political posturing a month before the midterm elections or if it leads to meaningful action on Capitol Hill.
Members of Congress on both sides of the aisle like Democratic Senate leader Chuck Schumer and Ohio Republican Dave Joyce hope the executive action will be a springboard for more legislation to lighten restrictions. Senator Cory Booker (D-NJ) is reportedly working across party lines to pass a “SAFE Banking Plus” bill that would include banking reform for the industry plus provisions for veterans healthcare and Small Business Administration loan mandates for small cannabis businesses. Nine Republican senators are already cosponsoring a draft of the SAFE Banking Act, plus most Senate Democrats.
Zuanic thinks it’s likely a bill will get passed during the lame duck session between the November election and when the new Congress is inaugurated in January that could help push the MSOS ETF to $20 per share, 80% higher than its current price around $11.
The most important thing the short term is SAFE Plus, Republican and Democratic senators standing in front of a podium after the election saying we have a deal and we want to get this passed in the lame-duck session,” Zuanic says. “The way the bill looks right now based on the draft, it looks like it’ll probably have more than 60 votes.”
