Ding Dong, Jeff Sessions Is Gone — but That’s Not the Big News for Canadian Marijuana Stocks
Well, that didn’t take long. Many expected that President Trump would replace Jeff Sessions as U.S. Attorney General after the U.S. elections on Nov. 6. But for Sessions to be booted out the very next day after the elections was a quicker move than anticipated.
Sessions became the public face of opposition to marijuana legalization as a result of his history of critical comments about the drug and his overturning of Obama-era policies that kept the U.S. Department of Justice (DOJ) from intervening in states that had legalized marijuana. Almost immediately after his ousting, the cannabis industry began to celebrate.
The replacement of Sessions could turn out to be good news for cannabis-related businesses operating in the U.S. Hold the champagne for Canadian marijuana stocks, though. There’s some big news that could be great for these stocks — but it has nothing to do with Jeff Sessions’ departure.
Overrated impact
Some observers were quick to attribute Wednesday’s gains for Canadian marijuana stocks like Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC), and Tilray (NASDAQ:TLRY) to Jeff Sessions’ ouster. And it’s true that these stocks did jump after reports surfaced about Sessions being replaced as U.S. Attorney General. But the reality is that marijuana stocks had already moved much higher on Wednesday, even before the Sessions news broke.
More important, though, is the fact that the exit of Jeff Sessions has little to do with most Canadian marijuana stocks. That’s certainly the case for Aurora, Canopy Growth, and Tilray. None of these companies have significant operations in the U.S.
The only notable interactions between Jeff Sessions’ DOJ and Canadian marijuana companies were positive ones. In September, the U.S. Drug Enforcement Administration (DEA), which falls under the DOJ, granted approval for Tilray to provide a cannabinoid drug to the University of California San Diego Center for Medicinal Cannabis Research to use in a clinical trial. In October, the DEA allowed Canopy Growth to export medical cannabis to the U.S. for a clinical study, also.
For the U.S. cannabis industry, the departure of Jeff Sessions indeed is good news. But for now, at least, the leader of the U.S. DOJ is about as relevant to Aurora, Canopy Growth, and Tilray as the person who serves as the U.S. Secretary of Energy. (It’s former Texas governor Rick Perry, by the way.)
The truly big news
There was news this week, however, that truly could be important to the major Canadian marijuana stocks. And this news was the primary reason stocks like Aurora, Canopy Growth, and Tilray generated nice gains on Wednesday, well before the Jeff Sessions story hit the wires.
The truly big news was related to the potential ramifications of the U.S. elections. It wasn’t that Michigan voted to legalize recreational marijuana, although that was certainly a major development. It wasn’t that Missouri and Utah voted to legalize medical marijuana, which also were important stories in their own right. No, the key outcome from the U.S. elections for Canadian marijuana stocks was that the odds of changes being made to U.S. federal laws prohibiting marijuana just improved significantly.
Come January 2019, Democrats will claim a majority in the U.S. House of Representatives. Nearly 70% of Democratic voters support marijuana legalization, according to a recent Pew Research Center survey. That’s a lot higher than the 45% of Republicans who support marijuana legalization. It stands to reason that a Democrat-controlled House is much more likely to pass marijuana-reform legislation than a GOP-controlled House.
Does this mean that changes to U.S. federal laws on marijuana will be a shoo-in? Not at all. Even if legislation passes the House, it also has to be approved by the Senate and signed by the president. However, the chances of three hurdles being jumped increase when the probability that the first hurdle will be cleared increases.
No overrating of this impact
What would happen if the U.S. changes its federal laws to either legalize marijuana nationally or at least leave the issue to the states (which is more likely)? The impact on Canadian marijuana stocks would be enormous.
Consider that the total Canadian marijuana market should be around $5.5 billion by 2022, according to Arcview Market Research and BDS Analytics. The marijuana market in the rest of the world outside of Canada and the U.S. should add another $3.1 billion. But the U.S. is likely to claim marijuana sales of $23.4 billion within the next four years.
The current valuations of Aurora Cannabis, Canopy Growth, and Tilray are ridiculously high if the companies can’t compete in the U.S. But they don’t look nearly as absurd if the U.S. market opened up for business for them.
Jeff Sessions is gone, but that really doesn’t matter for the top Canadian marijuana growers. The yellow brick road leading to opening the lucrative U.S. market for these companies starts in the U.S. Congress. To mix metaphors between The Wizard of Oz and the Beatles, it could be a long and winding road.
Originally published at www.fool.com on November 9, 2018.
