Cannabis stocks rallied across the board Thursday, as investors returned to the beaten-down-sector with a fresh enthusiasm, following a historic House vote in favor of a bill that would lift the federal ban on weed.
The three biggest Canadian licensed producers – Canopy Growth, Cronos Group and Aurora Cannabis – soared more than 10%. And the ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ +0.28% was up more than 6%, with 32 of its 36 components trading higher.
The move came even as the sponsors of the bill cautioned that the Senate was unlikely to take it up any time soon. The bill, which was introduced by House Judiciary Committee Chairman Jerrold Nadler, a New York Democrat, passed Wednesday by a 24-10 vote in favor. It includes provisions to expunge past criminal records and would introduce a 5% cannabis sales tax.
For more on the bill and vote, read now: House panel passes bill that aims to legalize marijuana, but top Democrat concedes ‘Senate will take its own time’
“The vote was mostly symbolic and is just the first step toward full legalization,” said Jason Wilson, banking and cannabis expert at the ETF. “But legalization will come eventually and there’s still a lot of money on sidelines looking to get into the space.”
CFRA analyst Garrett Nelson agreed.
“We think the bill is likely to also be approved by the full House,” he wrote in a note to clients. “At best, we think the proposed legislation is likely to be slow-tracked in the Senate with numerous revisions given the majority leader’s opposition to legalization, but it is also possible that it goes nowhere.
“Nevertheless, the development is a positive for sentiment toward heavily-shorted cannabis equities, which have been battered by Canadian market oversaturation, as investors shift focus toward opportunity in the U.S., the world’s largest cannabis market (one-third of global demand).”
The news ignited a rally on Wednesday, that comes after months of selling by investors disappointed at the slower-than-expected rollout of the Canadian legal market and continued disappointing company earnings. Canada’s woes are mostly blamed on the shortage of retail stores that has allowed the black market to flourish, a problem also cited by U.S. companies.
Stocks may have been further boosted by reports this week that the government of the country’s most populous province, Ontario, was looking to change several aspects of the current model that has allowed a meager 25 stores to open thus far — that’s one for every 600,000 residents, Tilray Inc. Chief Executive Brendan Kennedy said in the company’s third-quarter earnings call.
According to reports, the government-run Ontario Cannabis Store may allow private companies to assist in storage and distribution of weed and the government is eyeing the elimination of assigning new licenses via a lottery , instead favoring open applications.
Distribution is not the only factor hurting the sector, however. It still lacks the support of institutional investors, said Wilson, including in Canada where access to capital markets is difficult and expensive. Retail investors that got burned swiftly dumped their positions in cannabis, much as early investors in the dot.com boom of the 2000s fled for the exits, he said.
“People were investing in companies with a fully funded business plan, but no particular expertise with cannabis and there was no real infrastructure,” he said. “All of that had to be created.”