Cannabis stocks are descending from an initial pump as a result of President Joe Biden’s announcement last Thursday pardoning everyone convicted of simple marijuana possession under federal law. Now, it is leading speculation as a breaking point for further cannabis reformation and legislation throughout the country.
Winners and Losers of The Biden Announcement
Since the announcement, Nasdaq-listed Canadian stocks like Canopy Growth Corp. (CBC) and Aurora Cannabis (ACB) both tanked on Friday and the following Monday. Since the Thursday pump, these stocks have decreased by around 20%.
The ETFMG Alternative Harvest ETF (MJ) has over $410 million in assets that include some of these Canadian companies, is down 56% this year and is still on a decline despite the news.
“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,” saiy Cantor Fitzgerald, managing director of 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 Advisor Shares Pure U.S. Cannabis ETF (MSOS), with over $734 million in net assets, contains less liquid stocks that did not face as much of a decline, but was still more volatile than the S&P 500 Index.
Not all companies are at a loss. MSOS’s largest companies, Chicago-based Green Thumb Industries (GTBIF) and Massachusetts-based dispensary Curaleaf (CURLF), are both up more than 20% since Biden’s pardon.
Canadian Cannabis Stocks Dip More than U.S. Businesses
Many speculate as to why U.S. stocks held up in value relative to their Canadian competitors despite both increasing in value on Thursday. One reason why U.S. stocks sustained their price may have been a result of Biden’s request to the Department of Health and Human Services and the Attorney General to reconsider marijuana’s federal classification. If marijuana is removed from the schedule I list of controlled substances, it would change the strict tax regulations imposed on cannabis companies and allow them to make regular business deductions as other industries.
“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 regulations currently imposed on the cannabis industry have created tax rates higher than small businesses can compete with to form a stable profit. While larger companies are able to keep up business, their projected profits are capped by market regulations. These stocks will continue to decay until greater political action is able to back Biden’s proclamation.
Congress Support For The Presidential Pardon
Support from both parties of Congress has shown support for Biden’s act. Members of Congress like Democratic Senate leader Chuck Schumer and Ohio Republican Dave Joyce believe the executive decision will open the doors for further legislation to legalize cannabis.
Democrat Senator of New Jersey Cory Booker has created a plan to collaborate with both parties to enact a “SAFE Banking Plus” bill in order to allow banking and business loans for cannabis businesses while giving subsidies to veteran healthcare. Most Democrat senators are already in support of the bill, and has also gained the support of nine Republican senators.
Zuanic believes that the bill will pass between November and January when Congress is reelected into office. If a bill is passed, it is likely the fuel necessary to push MSOS ETF to $20 per share from its current value at $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 will probably have more than 60 votes.”
