Cannabis stocks are hot ahead of a House panel hearing on a federal legalization bill

Cannabis stocks are hot ahead of a House panel hearing on a federal legalization bill

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Marijuana plants grow in the Mother Room at the Canopy Growth Corp. facility in Smith Falls, Ontario, Canada, on Tuesday, Dec. 19, 2017.
Chris Roussakis | Bloomberg | Getty Images

Investor optimism over the possibility of federal cannabis legalization has contributed to a strong rally in beaten-down pot stocks.

The Alternative Harvest ETF has gained more than 10% in March, and its on pace for its best month since February 2021. The exchange-traded fund was just about flat year to date but down 50% over the past 12-months. The recent upswing in marijuana shares mirrors moves higher seen early last year on similar reform hopes.

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On Wednesday, the House Rules Committee is set to hold a hearing on the Marijuana Opportunity Reinvestment and Expungement Act, which would decriminalize cannabis at the federal level. The bill — better known as the MORE Act — would also create provisions for banking and consumer packaged goods sales. The measure is expected to head to the full House for a vote Friday.

“I’ve been very optimistic about the MORE Act passing the House.” Rep. Ed Perlmutter, D-Colo., told CNBC ahead of the hearing. The bill faces an uncertain future in the razor-thin Democratically controlled Senate.

Perlmutter, a member on the Rules panel a co-sponsor of the MORE Act, has long been a supporter of legalizing cannabis. He’s also sponsor of the Secure and Fair Enforcement Banking Act, a cannabis reform bill designed to provide multistate operators access to banking and other financial services. Colorado and Washington became the first states to legalize the recreational use of marijuana in 2012.

“We’re confident something is going to move this year,” Perlmutter added. “It’s much easier for banks and other financial institutions, insurance companies, credit unions, real estate companies to do business with cannabis businesses. It really would allow the industry to start moving forward.”

The MORE Act passed the Democratic-controlled House in December 2020 in a 228-164 vote largely divided along party lines. But it went nowhere in the then-Republican majority Senate.

Cowen analyst Jaret Seiberg calls Wednesday’s House vote “symbolic” and estimates Democrats would need at least 10 Republican votes in the Senate to overcome a filibuster and pass a cannabis bill. However, he said the House debate could prove insightful with midterm elections looming this November.

In a note last week, Seiberg said, “There is a high probability that Republicans will control the House next year. This debate will be a chance to see how many support legalization even if they object to the MORE Act. This would be especially relevant if the House goes Republican but Democrats manage to keep control of the Senate. It would mean there would be a path for cannabis legislation next year.”

On the Senate side, Majority Leader Chuck Schumer, D-N.Y., along with Sen. Cory Booker, D-N.J., and Sen. Ron Wyden, D-Ore., have sponsored the Cannabis Administration and Opportunity Act (CAOA), which is among several marijuana bills floating around.

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Canopy Growth CEO David Klein said federal legalization would be transformative for the Canada-based company in the eyes of investors. Canopy bought MSO Acreage for $3.4 billion in 2019, it sells the Martha Stewart’s CBD line in the U.S.. and it acquired U.S. cannabis edible brand Wana in a $298 million deal in October 2021.

Canopy shares have gained roughly 13% in the past month. But they’re dropped nearly 8% year to date, and they’re down 74% in the past 12 months.

“For us, it would allow us to bring businesses like Wana and Acreage into our [profit and loss] and run it more like a consolidated enterprise, which would be super exciting for our investors. It would also show we already have a good mature, growing U.S. multistate presence,” Klein told CNBC.

Constellation Brands, the spirits and beer giant, owns a 36% stake in Canopy. Stifel analyst Andrew Carter has forecasted that higher margin drinkable cannabis would see accelerated growth in 2022. According to data from Headset, drinkable cannabis currently makes up 1% of the U.S. market.

“We’ve always been really bullish on drinks,” Klein said. “We are seeing that new consumers coming into the category like to enter the category through edibles and drinks. We think that as more people come into the category, the new comers to the category, will over index in edibles and drinks.”

According to a note Tuesday from Bank of America, Schumer’s CAOA bill is expected to be introduced in the Senate by late April.

Industry analysts generally see a murky path forward for all of the cannabis reform bills on Capitol Hill, but but they feel that meaningful steps towards legalization are expected to continue to spark interest in cannabis stocks.

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