Why Aurora Cannabis, Canopy Growth and Tilray shares rebounded today

What happened

Marijuana stocks opened higher on Monday – and okay, with stock markets glowing green across the board, it seems pretty much everything open higher. But for canopy growth (CCG 7.87%), Tilray (TLRY 8.60%)and Aurora Cannabis (PBR 7.21%) — up 7.9%, 7.5% and 6.7%, respectively, as of 1 p.m. ET — there was actually a bit of industry-specific optimism supporting their rally.

On Friday, Lester Black, a journalist who has covered the cannabis industry for many years, predicted in a column for data-centric news site FiveThirtyEight that marijuana could very well be decriminalized “by the end of [President Biden’s] current mandate. »

So what

As you can imagine, that prediction was music to marijuana investors’ ears — perhaps not immediately, amid Friday’s stock selloff — but certainly on Monday as the market began to stabilize. As Black explained, President Biden’s order for the US government to “promptly” review the case of deferring marijuana from a Schedule I drug to a less restrictive level is something less than that. a large-scale legalization decision – but also “more than just an empty gesture.” In fact, he said, it “triggered a process that could end federal pot prohibition as we know it.”

Maintaining marijuana’s Schedule I status — which is only for drugs that are exceptionally dangerous and have no valid medical use — “makes no sense,” President Biden has said.

Black called it a “unique…and powerful” statement that implies Biden wants the drug delay to happen “quickly.”

That being said, what might constitute “quickly” is open to interpretation. According to Black, rescheduling is usually a long and tedious process. First, the Food and Drug Administration must conduct a scientific evaluation of the drug, which is then sent to the Secretary of Health and Human Services for review. After that, the secretary makes a recommendation to the Drug Enforcement Administration (DEA). Ultimately, the final decision rests with the Attorney General, who, as head of the Department of Justice, has the DEA under his control. It’s already a somewhat complicated process, and as Black points out, “there are many ways Biden’s programming directive could fail” along the way.

Now what

Ultimately, Black still concludes that legalization may happen sooner than some think — but that may not help marijuana investors much. As The Wall Street Journal Observed in a column also published on Friday, “legal grass is not always greener for cannabis companies”, as illustrated by the example of the legalization of marijuana in Canada.

Describing the cannabis industry in Canada as being in “a pitiful state” four years after legalization, The Wall Street Journal Carol Ryan notes that investors who piled into Canadian cannabis companies “have been wiped out.” Incidentally, Aurora, Tilray, and Canopy Growth are all based in Canada, and Ryan notes that Canadian marijuana stocks have collectively lost 85% of their value over the past few years, as legalization has allowed hundreds of companies to enter the market, cutting marijuana prices in half and also squeezing profit margins.

Certainly, legalization in the much larger U.S. market may allow marijuana companies to “catch up to volume,” as the old saying goes. But remember, the full version of that joke is, “We lose money on every sale, but we get it back in volume.” It’s not a sustainable business model.

After watching Aurora Cannabis, Tilray and Canopy Growth lose money for four straight years selling legal weed in Canada, I have serious doubts that they would do better in a post-legalization US market.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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