Cannabis stocks are highly correlated with the broader market, analyst says, and U.S. stocks were down sharply Tuesday
Cannabis stocks tumbled across the board on Tuesday, reversing their premarket gains, as the initial boost offered by the passage of a banking bill by the House (link) late Monday gave way to uncertainty about its likely fate in the Senate.
"We do not see an immediate path forward for SAFE in the Senate as Senate Democratic leaders are likely to first try to advance legalization legislation," said Cowen Washington Research Group analyst Jaret Seiberg said in a note.
That's after Senate Majority Leader Chuck Schumer, the New York Democrat, promised to make cannabis reforms a key part of the current Congress (link) and called for an end to the federal prohibition that continues to classify cannabis alongside heroin and that has hampered the development of the sector.
Cantor Fitzgerald analyst Pablo Zuanic agreed that Schumer and his supporters are more likely to aim for comprehensive reform and avoid less-ambitious isolated federal level changes.
See now: U.S. cannabis producers are now favored by Wall Street analysts, who've soured on Canadian companies (link)
"That said, with the considerable limitations of a two-year Congressional term, President Biden's apparent lukewarm support, and the threat of a Republican filibuster, we are starting to see a 'compromise scenario' as quite likely," Zuanic wrote in a note to clients. "Too much has been said for these leading Democrats to end up doing nothing on the marijuana reform front, in our view."
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Zuanic envisages a "narrower bill of bills," that would include federal level decriminalization, which is acceptable to Biden based on past comments, and the corresponding rescheduling of cannabis from Class 1 status. It would also include banking reform -- to get Republican support -- and allow states to decide on their own programs, possibly including incentives for those that introduce the key social equity provisions that the bill's sponsors have sought.
That scenario would be positive for U.S. multi-state operators as they would benefit from banking reform, and would not be burdened with the effort and expense of interstate trade or changes to distribution in the medium term.
Banking reform provisions would benefit valuations as they would likely propel the U.S. exchanges to list MSOs, which now are restricted to Canadian exchanges or the over-the-counter market.
"Such a move would mean, in our opinion, that both the Toronto Stock Exchange and U.S. exchanges would have to be OK with large listed Canadian licensed producers buying U.S. MSOs (in full or stakes)," said Zuanic.
Korey Bauer, chief investment officer and portfolio manager of the Cannabis Growth Fund (link) from Foothill Capital Management, said the House vote was already priced into the market, so the market is now waiting to see what happens in the Senate.
What's more, "cannabis stocks are highly correlated to overall markets right now," he said. "Cannabis correlation decoupled from the market in early 2021 and actually was negative on a rolling basis. Now that correlation is at the highest levels since November of 2020."
The broader market was sharply lower Tuesday, putting U.S. stocks on track for back-to-back losses, as concerns about rising coronavirus cases globally (link) offset healthy U.S. corporate earnings reports for the first quarter.
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Adding to the downdraft, earnings from the big Canadian cannabis companies have mostly disappointed this season, with COVID-19 effects, pricing pressure and oversupply still hurting results.
"We think valuations were significantly stretched at the highs and the market is opening the door again to buy high quality cannabis companies at significantly better valuations," said Bauer.
Against that background, the Cannabis ETF (THCX) was down 3.9%, with nearly all of its components trading lower, with just cbcMD Inc. (YCBD) slightly higher.
Canopy Growth Corp. (WEED.T) was down 6%, Cronos Group Inc. (CRON.T) was down 4.9% and Tilray Inc. (TLRY) was down 7.5%. Aphria Inc. (APHA.T), with which it is merging, was down 7.4%.
See now: Aphria and Tilray cannabis merger moves a step closer to approval (link)
Aurora Cannabis Inc. was down 3.5%.
Among U.S. companies, GrowGeneration Corp. (GRWG) was down 5.2%, Harvest Health & Recreation Inc. was down 4.2% and Curaleaf Holdings Inc. was down 4.1%.
See:GrowGeneration shares up 2.9% premarket after it backs 2021 revenue guidance (link)
Green Thumb Industries Inc. was down 2.3% and cannabis software provider Akerna Corp. (KERN) was down 12.8%.
-Ciara Linnane; 415-439-6400; AskNewswires@dowjones.com
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