Fundamentally, cannabis stocks represent one of the most groundbreaking industries in the history of commerce. Once a maligned and illegal sector, brewing progressive ideals pushed for broader legitimacy of the space, converting the arena into a legal (and therefore taxable) enterprise. However, once the initial enthusiasm faded, the “botanical” industry struggled for traction.
In the past year, cannabis stocks incurred significant red ink. Of course, much of that centered on blistering inflation and the Federal Reserve’s subsequent response of hiking the benchmark interest rate. Unfortunately, this dynamic invariably impacted economic stability and consumer sentiment. With households forced to choose between the essentials and the wants, many opted for the former out of financial coercion.
However, an ongoing concern focuses on the ability for legal marijuana operators to attract necessary capital for their operations. Here, an ambiguity exists regarding the actual legality of cannabis, along with the implications of interstate commerce and the nuances between state and federal laws. To avoid headaches, many if not most financial institutions refuse to deal with the industry altogether.
Nevertheless, a reintroduced bipartisan bill may provide the spark that the “green” sector has been seeking for a long time.
Fresh Hope for Cannabis Stocks
According to a Reuters report on Thursday, “the Bipartisan Senate and House lawmakers in the U.S. reintroduced the Secure and Fair Enforcement (SAFE) Banking Act to free up banking services for the cannabis sector.” Per CNBC, previous iterations of the bill passed in the House seven times. However, the SAFE Act could see a vote on the Senate floor for the first time.
“For the first time, we have a path for SAFE Banking to move through the Senate Banking Committee and get a vote on the floor of the Senate,” Sen. Jeff Merkley, who helped introduce the bill, said in a statement. “Let’s make 2023 the year that we get this bill signed into law so we can ensure that all legal cannabis businesses have access to the financial services they need to help keep their employees, their businesses, and their communities safe.”
Also, Senate Majority Leader Chuck Schumer expressed support for the bill. He further added that he would attempt to integrate criminal justice provisions in the legislation when it reaches the floor.
Naturally, several cannabis stocks – including Tilray (TLRY), Cronos Group (CRON) and SNDL (SNDL) – popped higher on Thursday. Also, Curaleaf (CURLF) CEO Matt Darin endorsed the action. “The SAFE Banking Act will provide urgently needed relief to cannabis businesses of all sizes and act as a stepping stone to broader reforms,” the chief exec stated.
Longstanding Ambiguity Could See a Critical Clarification
While certain progressive states pioneered the legalization of both medical and recreational marijuana, cannabis stocks couldn’t really blossom until federal mandates effectively approved the sector. And that’s one of the reasons why the Agriculture Improvement Act of 2018 – the so-called farm bill – was so important. Amid the granular details pertinent mostly to agricultural specialists, the act specified the definition of hemp or cannabidiol (CBD).
On paper, the CBD market received legitimacy thanks to a clear, scientific label: hemp or CBD must have a tetrahydrocannabinol (THC) concentration of no more than 0.3%. However, the Department of Justice and the Drug Enforcement Administration clearly label marijuana as a Schedule I drug. Theoretically, then, if a CBD product accidentally contains too much THC, all parties involved in the business could potentially be hit with federal charges.
By the way, the above scenario doesn’t carry a zero-probability profile. As PBS noted, “[t]he extraction process for CBD and THC is essentially the same. As a consequence, CBD can be contaminated with THC, chemical solvents or pesticides if the extraction is done improperly.”
Not surprisingly, many financial institutions see limited upside and massive risks supporting cannabis stocks. However, with the SAFE Act, the measure could potentially protect these institutions as parties to a federal crime should the underlying cannabis entity do something improper.
Inherently, the proposal represents a win-win: the enterprises undergirding cannabis stocks can have access to capital and do away with cash-only business models while financiers can have confident, clarified access to a burgeoning market.
Steep Challenges Remain
Although the latest news on Washington bolstered cannabis stocks, the sector presents obvious challenges. Several top players in the field (not even mentioning the laggards) largely failed to gain positive traction over the past year. For instance, TLRY stock slipped 53% during that time, while CRON and SNDL fell 39.47% and 71%, respectively.
However, many of these challenges centered on the lack of true legitimacy and thus, the inability to generate maximum capital. That might change depending on the outcome of the voting for the SAFE Act. Therefore, investors interested in cannabis stocks should pay close attention to ongoing developments.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
