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Have marijuana Stocks Finally Bottomed out?

Marijuana stocks have had a tough 2019 as slower-than-expected growth in the Canadian markets, contracting wholesale prices and a lack of progress in US legalization efforts have made profits elusive and spooked investors.

A slew of disappointing earnings reports recently has put additional pressure on pot stocks. After disappointing reports from Tilray (TLRY), Canopy Growth (CGC) and Aurora Cannabis (ACB) last week, the Alternative harvest ETF hit a closing low of $16.07/share on Monday – down 39% YTD - and off more than 59% since hitting all-time highs in March 2019.

Tuesday and Wednesday brought about an abrupt change of course however, thanks to the advancement of an important piece of legalization legislature in the US House of Representatives. Over the past two sessions, stocks across the industry have gained over 10% on average, led by Aurora Cannabis which is up 22% and Canopy Growth, up 27%.

The Marijuana Opportunity Reinvestment and Expungement (MORE) Act would remove cannabis from the Controlled Substances Act Schedule and broadly seek to address many of the social justice issues associated with the past several decades of the enforcement of prohibition.

Introduced by House Judiciary Committee Chairman Jerry Nadler (D, NY), the bill would:

- Open Small Business Administration loans for marijuana businesses
- Prohibit discrimination based on prior possession convictions
- Prohibit the denial of any federal government benefit or subsidy based on prior convictions
- Prohibit making marijuana use or possession a factor in any immigration proceeding
- Establish a process by which data will be collected on the impact of legalization on racial minorities and economically disadvantaged communities

On Wednesday, after a final “markup” from the other relevant committees, the Judiciary Committee voted 24-10 to advance the bill to a full house floor vote. Rep. Nadler predicted that it would easily pass the house “by the end of the year,” but also added, “The Senate will take its own time…”

The House already passed the SAFE Banking Act – which would allow banks an other financial institutions to do business with marijuana firms without fear of penalty – in September, but no vote is currently scheduled in the Senate.

It’s widely expected that President Trump would sign either piece of legislation into law if they were approved by both houses of Congress

Does the recent success in new legislation mean the 2019 of pot stocks is over? Maybe…

US legalization would be a huge win for the industry as a whole, but there are a few caveats.

First, just getting either piece of legislation to a Senate vote may be a challenge for proponents. Although sister-legislation to the MORE Act has the sponsorship of Senator and Presidential candidate Kamala Harris (D, CA), Senate Majority Leader mitch McConnell (R, KY) has to approve a full vote - and he has shown limited interest so far.

McConnell – who has referred to himself as the legislative “grim reaper” because of his willingness to kill bills he doesn’t like – would probably need the urging of moderate Republicans in tight 2020 re-election races to convince him.

More importantly, even assuming that the MORE Act does pass and is signed into law, it’s not clear right now who the eventual winners would be.

States would still have the right to legislate their own more restrictive policies and the ways they would do that are still mostly unknown. It’s safe to assume that the big Canadian producers who already have investment from and relationships with US companies would see an immediate increase in sales.

The effect on the vertically integrated Multi-State Operators (MSOs) is much less certain. In the best-case scenario, their first mover advantage in the production, distribution and sale of marijuana in the states where it is currently legal would translate into comparable market share across the country.

It’s also possible however that if a large number of states makes it easy enough to obtain new licenses, companies like Acreage Holdings, MedMen and Curaleaf will face new competition from new entrants and see dilution of the the value of their sizable investments.

Progress toward passage of the SAFE Banking Act and MORE Act would undoubtedly be a boon to the industry as a whole, but investors should be cautious about jumping in with both feet and pay close attention to the nuances of the pending legislation as it advances to mke the most accurate assesment of who the winners will be.

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