Wall Street’s early enthusiasm for President Joe Biden’s mass pardon of federal simple marijuana possession convictions, announced last Thursday, has already faded. Cannabis stocks that spiked on the news are now sliding back down, and traders are debating whether the move actually marks a turning point for broader cannabis reform and legislation.
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.
It hasn’t been bad news across the board, though. Chicago-based Green Thumb Industries (GTBIF) and Massachusetts-based dispensary Curaleaf (CURLF) — MSOS’s two largest holdings — are both up more than 20% since Biden’s pardon.
Canadian Cannabis Stocks Dip More than U.S. Businesses
So why did U.S. stocks hold their value better than their Canadian counterparts, even though both categories rallied on Thursday? Part of the answer may lie in Biden’s request that the Department of Health and Human Services and the Attorney General revisit marijuana’s federal classification. Should cannabis be taken off the Schedule I list of controlled substances, the strict tax rules currently imposed on cannabis companies would loosen, letting them take standard business deductions the way other industries already can.
“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.”
Under current rules, cannabis businesses face tax burdens that smaller operators simply can’t absorb while still turning a stable profit. Bigger companies can stay afloat, but even their upside is squeezed by existing market regulations. Expect these stocks to keep sliding until real political action follows through on Biden’s announcement.
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.
New Jersey Democrat Cory Booker, meanwhile, is working across the aisle on a “SAFE Banking Plus” bill that would open up banking access and business loans to cannabis companies while directing subsidies toward veteran healthcare. Nearly all Democrat senators already back the bill, which has also picked up support from 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.”
