Cannabis stocks rally as federal reform hangs in the balance

Cannabis stocks rally as federal reform hangs in the balance
<a href="">TerreDiCannabis_</a> / Pixabay

The volatility in cannabis stocks continues today with a rally in several names as the prospect of federal reform hangs in the balance.

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Tilray led the rally in pot stocks today with a 7% gain, while Aphria was up 6%, and Aurora Cannabis and Canopy Growth each gained 3%. Cronos Group and GrowGeneration each increased 2%, and Cresco Labs was up 3%. The rally marks a significant turnaround from last week when cannabis stocks plunged on most days, driven alongside other growth stocks.

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However, not all cannabis stocks were rallying in early trading today. Curaleaf Holdings and Green Thumb Industries each declined 1%, while Trulieve Cannabis was off by 2%.

Progress On Federal Cannabis Reform

Weed stocks have been rising higher and higher since President Joe Biden was elected in November. Democrats said in January that they would make federal cannabis reform a priority this year. Stifel analyst Andrew Partheniou called the bill they were working on with some Republicans "the 'Goldilocks' scenario."

He noted that significant risks to marijuana legalization remain. However, the move demonstrates that there is legislative support that builds on "unprecedented momentum" for federal pro-cannabis reform because some Republicans were involved in the effort.

Partheniou added that it marks the first time one of Congress' most powerful lawmakers has discussed a federal bill. Further, he said legislative leaders had probably spoken with industry stakeholders to understand what cannabis operators need while also considering overregulation and other unintended consequences.

The Goldilocks Scenario

The Stifel analyst believes that in a Goldilocks scenario, federal cannabis reform could remove the 280e penalty, possibly boosting cannabis companies' free cash flow by two to five times. He said Senate Majority Leader Chuck Schumer's comments appear to focus on enabling states to enact their own policies for marijuana by removing the conflict between state and federal laws.

Partheniou explained that this move could remove the 280p penalty that has U.S. cannabis operators paying an effective tax rate of 50% of more. In a scenario where his forecasts were unimpeded by the 280e penalty and a 30% tax is levied instead, he estimates that operators' free cash flow would at least double, if not increase by more than five times.

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