Are cannabis stocks poised for a second wave?

Fresh US legislation and a major merger between two Canadian pioneers suggests a second wave of investor interest might be coming for cannabis stocks. 

US legislation could signal cannabis stock rally 

The US House of Representatives has passed some of the most pro-liberalisation cannabis law reforms the country has witnessed: the MORE Act. 

The Marijuana Opportunity, Reinvestment and Expungement Act calls for removal of cannabis from the list of federally controlled substances, as well as doing away with certain cannabis-related convictions. 

This suggests good things are coming to the marijuana sector in the US. Several states have already made either medical or personal consumption legal, but it is still illegal on a federal level. However, the terms of the new bill will insulate individual states from federal oversight, meaning they essentially can set their own laws and let cannabis-related businesses operate without fear of prosecution. 

As it stands, only six states remain where consumption of cannabis is still fully illegal. Across the remaining states, medical and personal use is either legal or decriminalised.  

Joe Biden’s upcoming administration has also inspired optimism in marijuana enthusiasts and cannabis businesses. His White House could potentially be more pragmatic and friendly towards cannabis use. Even so, the MORE Act was tabled before the US election, so the move towards full, federal legalisation could happen sooner rather than later. 

MORE means cannabis companies should be able to compete on a more even footing with regards to tax, provide them with better access to capital, and possibly stimulate further institutional investment. It could also ease along the passage of the Safe and Fair Enforcement (SAFE) Banking Act. SAFE relates to the disposition of funds generated from the cannabis industry. Essentially, it will let banks accept and process money from cannabis businesses as the money would be legitimate. 

Canadian cannabis firms merge 

North of the border, two of Canada’s largest cannabis growers have announced merger plans that will turn the joint venture into the world’s largest cannabis company. 

Tilray and Aphria will merge an all-share deal which will give the new entity a valuation of CAD$4.8bn ($2.8bn). The two companies’ combined revenues across the past 12 months has totalled in excess of CAD$875.5m ($689.7m). 

Canadian firms are looking southward and seeing a potentially massively lucrative market in the US. But, as it remains illegal under US federal law, cross-border movements is still off limits. 

The merger, according to Tilray, will generate up to CAD$98.4m ($77.4) in cost savings annually. Tilray, for instance, won’t have to buy wholesale cannabis from other suppliers. Instead, the new entity can concentrate on increasing the output of branded edible cannabis products – products in high demand during lockdown. 

Canada is one of world’s legal cannabis leaders. Full recreational legalisation was ratified there in 2018. Many of its companies, like Canopy for instance, already have tie in deals with American celebs like Snoop Dogg and Martha Stewart. It’s hoped, with the MORE Act, that full legalisation will be coming soon to the US, and Canadian cannabis capital can start pouring in. 

International cannabis stocks offering solid returns 

A number of international cannabis-related firms are beginning to show why faith in a second investor wave is strengthening. GrowGeneration Corp, which sits in the Rize ETF tracker, contributed 60% of the returns to the Foxberry Index in November 2020.  

Other similar companies performing well include the UK’s GW Pharmaceuticals and US-based NewAge Inc. All of the firms mentioned here are at the forefront of rapid market development. 

A bright outlook for cannabis shares? 

All of the above are creating an ideal blend of market conditions that has investors jonesing for their cannabis investment fix. Will be the hit they’re looking for? It’s possible, but a lot does hinge on how the Biden administration approaches the cannabis question.