Investing in marijuana stocks can sometimes be risky and frustrating. Although many businesses show promise, with the sector being federally illegal in the U.S., it can make expansion a lot more complicated and expensive. However, there’s optimism that reform could…
be on the way for the sector. A bill that would decriminalize marijuana is getting lawmakers’ attention and could get voted on this week. If that happens and the result is positive, marijuana stocks could be back in the mainstream, potentially sending their valuations soaring in April.
The MORE Act to be voted on this week
This week, the House of Representatives is expected to vote on the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act. If it were to become law (which would require the bill making it through the Senate as well, before being signed by the president), it would end the federal ban on pot and remove it from the Controlled Substances Act. Those changes could enable marijuana multi-state operators (MSOs) in the country to freely transport their products across state lines (currently that is not possible due to the federal ban on pot). Plus, it may potentially pave the way for Canadian marijuana companies to enter the U.S. market as well, leading to opportunities for consolidation in the industry.
Large ramifications for cannabis companies
Marijuana reform would bring both good and bad consequences for the sector. For instance, federal regulation of cannabis would likely come with more taxes. But on the flip side, it can facilitate expansion while also making it easier to do business with the banks (a problem the SAFE Banking Act has been trying to address), and it would likely lead to major pot stocks listing on a major exchange like the NYSE or Nasdaq — currently U.S.-based marijuana companies resort to trading over the counter and the Canadian Securities Exchange.
It’s no surprise that sometimes the stocks that pop the most on excitement related to cannabis legalization are Canadian-based companies. Tilray Brands ( TLRY -0.96% ) is eyeing the U.S. pot market and expects that to be a pathway that ultimately helps it hit $4 billion in annual revenue by 2024. In August 2021, the company announced it acquired senior convertible notes in MSO MedMen Enterprises, which would allow it to take an equity stake in the business. With more than two dozen retail locations across the country, MedMen would provide the company a way to penetrate the U.S. market immediately and boost its sales. Over the trailing 12 months, Tilray has generated just $589 million in revenue and has a long way to go to hit $4 billion. Marijuana reform in the U.S. would certainly improve those prospects in short order.
Another company that’s eager to see legalization (or something close to that) take place in the U.S. is Canopy Growth ( CGC 0.50% ). A rival of Tilray’s, it also has deals that are ready to go once it can close on them. It has been nearly three years since the company first announced plans to merge with MSO Acreage Holdings. Since then, it has made conditional deals involving edibles maker Wana Brands, and TerrAscend, which also has vertically integrated operations in multiple states. Canopy Growth has struggled with profitability and being able to incorporate results from their operations could help significantly improve its financials and make the stock a better buy.
Is now the time to buy pot stocks?
Investors need to tread carefully as marijuana bills in the past have been down this path before. In December 2020, the MORE Act passed the House, but that’s as far as it would go, and it would not even be voted on in the Senate. In February, the SAFE Banking Act passed the House for the sixth time. However, for the sixth straight time, it went nowhere afterward.
A year ago, there was optimism around pot stocks as the Democrats obtained control of both the House and Senate for the first time in a decade, giving investors hope that marijuana reform could be on the way. As a result, pot stocks soared — only to end up falling after no real progress was made.
There’s significant potential in the cannabis industry over the long term, and that’s what investors should focus on. If you aren’t prepared to hang on for years, then it can be a dangerous strategy to buy on news of excitement surrounding a marijuana bill. Because as investors have seen in the past, that optimism can…
Continue reading at THE MOTLEY FOOL