The growth opportunities in the marijuana industry are massive. One estimate from Fortune Business Insights has the global industry growing to nearly eight times its value to more than $444 billion by the end of the decade. But a lot of that hinges on what happens with legalization, both in the U.S. and around the globe.
There hasn’t been any significant reform in the U.S. (at the federal level), but investors are getting excited about recent developments. And that enthusiasm could soar higher in the weeks and months ahead.
Potential marijuana reform has investors talking about pot stocks again
Late last month, there was news that the Department of Health and Human Services recommended that the U.S. government reschedule marijuana. After conducting an 11-month review, the department concluded that marijuana doesn’t belong in the same classification as heroin and other harmful drugs. The proposed change would reclassify marijuana from a Schedule I substance to a Schedule III substance, where the Drug Enforcement Administration (DEA) says there is a “moderate to low potential for physical and psychological dependence.”
It’s ultimately up to the DEA whether it will make the change, but the mere recommendation has been enough to get investors more bullish on pot stocks again. And with valuations taking a beating in recent years, simply getting investors’ attention is a win for this struggling industry. Between Aug. 30, when the news was announced, and the end of last week (Sep. 15), shares of Aurora Cannabis (ACB -2.56%) rose by 112%, and Canopy Growth (CGC -10.07%) skyrocketed even higher by 197%.
But as hot as pot stocks have been recently, there’s another growth catalyst that could lift them even higher.
Will the SAFE Banking Act finally obtain approval?
One piece of legislation that could move pot stocks is the SAFE Banking Act. It won’t legalize marijuana, but it will give U.S.-based marijuana companies the ability to freely and easily do business with the big banks. Currently, it’s not easy for businesses involved with marijuana to obtain banking services. While it’s not impossible, big banks shy away from the industry due to the problems that might arise with the federal government for doing so.
The SAFE Banking Act has made it through the House several times, only to end up going nowhere afterward. But now there’s an opportunity to strike while the iron is hot and while regulators are talking about marijuana. There are reports that there may be a hearing within the next five weeks involving the Senate Banking Committee.
Having the committee green-light the bill could set the wheels in motion all over again in Congress. It could, however, also lead to yet another letdown for the marijuana industry and its investors. But if attitudes are indeed changing on marijuana, then there’s definitely an outside chance that this time could really be different for the bill.
Why passing the bill matters
Marijuana won’t become legal if the SAFE Banking Act passes, but it can potentially be a watershed moment for the industry. Without any significant marijuana reform passing at the federal level, it would finally be a sign that the government is taking a serious look at the substance, and SAFE Banking may prove to be an important step in getting the needle moving.
For a company such as Canopy Growth, which has established the special purpose vehicle Canopy USA to house its U.S.-based investments, the payoff is easy to see. If SAFE Banking obtains approval, the Nasdaq may ease its views on marijuana as well and potentially allow the company to consolidate the results of Canopy USA.
And if the bill ultimately leads to marijuana legalization, then Canopy Growth will again stand to benefit in a big way if it can finally enter the U.S. pot market, which has been a big part of its long-term strategy. In 2019, Canopy Growth first announced plans to acquire multi-state operator (MSO) Acreage Holdings.
In Aurora’s case, it’s a bit more surprising that the stock is surging as much as it is. The company hasn’t been lining up acquisitions in the U.S.. In fact, its focus has been on the international medical marijuana industry. Currently, the consumer cannabis business accounts for less than one-quarter of the company’s total revenue. But if a new U.S. cannabis market were to open up, it wouldn’t be a surprise if the company were to alter its strategy.
Aurora has also been giving investors more of a reason to be optimistic about its operations. Earlier this month, it announced that it was repurchasing convertible notes and reducing its debt and interest costs as it looks to obtain positive free cash flow by the end of next year.
Investors should remain cautious
It can be tempting to buy up these stocks, given their recent gains. But the danger with this industry is that it is highly volatile, and things can change quickly. If the SAFE Banking Act fails to pass again or the DEA decides against rescheduling marijuana, pot stocks could quickly give back these recent gains.
Investors shouldn’t forget that over the past five years, both of these stocks are still down more than 97%. While you can make the argument that given that kind of decline, there’s massive upside if marijuana legislation passes, it’s also hard to ignore the utter failure and horrible investments that these two stocks have proven to be.
If you have a high risk tolerance, then you may still want to consider investing in the cannabis industry — although Canopy Growth and Aurora Cannabis might not be your best options. Instead, you may want to consider some of the top MSOs in the country.
