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Stock Analyst Update

Cannabis Stocks Rally on Legalization Optimism After Biden’s Pardons, but Still Undervalued

Changes to current federal law could allow U.S. cannabis operators to pay lower taxes, access traditional banking services, and list on major stock exchanges.

President Joe Biden’s comments on cannabis legalization spurred a rally in the cannabis sector on Oct. 6. His major announcement was that all prior federal offenses of simple marijuana possession will be pardoned. The act is expected to affect approximately 6,500 people convicted from 1992 to 2021. Additionally, Biden called upon governors to take similar action toward pardoning possession offenses. More importantly for the legal cannabis industry, he plans to direct the Department of Health and Human Services and attorney general to review the product’s status as a Schedule 1 controlled substance, which places it among heroin and LSD and higher than methamphetamine and fentanyl.

Cannabis stocks jumped by as much as 30% following the news, but we make no changes to our forecasts or fair value estimates for our coverage list. We had already forecast that federal cannabis legalization in the form of states’ rights, which would recognize each state’s legal status, would pass by the end of 2023. The road to changing federal law has been difficult with a split Senate. However, we continue to think it will get the required 60 votes to pass. A change to current federal law would probably allow U.S. cannabis operators to pay lower taxes, access traditional banking services, and list on major stock exchanges. It would also likely trigger options that Canadian operators have to acquire U.S. assets.

Even after the rally, every cannabis stock we cover remains undervalued. No-moat Curaleaf (CURLF), Green Thumb (GTBIF), Tilray (TLRY), and Canopy Growth (CGC) trade at 5 stars while no-moat Aurora Cannabis (ACB) and Cronos (CRON) trade at 4 stars. For investors looking for exposure to a change to U.S. federal prohibition, we see U.S. multistate operators Curaleaf and Green Thumb as best positioned, given their direct market exposure. Canopy is the most attractive option among Canadian players, given its numerous deals for U.S. assets that would trigger under a change to federal law.

Kristoffer Inton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.