Why Canopy Growth, Green Thumb Industries, and Curaleaf Sank Today

What happened

Shares of cannabis companies Canopy Growth (CGC -2.40%), Green Thumb Industries (GTBIF -3.39%) and Curaleaf (CURLF -5.82%) were sinking on a positive day for the markets, down 1.9%, 3.5%, and 3.6%, respectively, as of 3:11 p.m. ET.

Since earnings season, cannabis stocks have been moving almost entirely on cannabis legislation news, specifically the prospect of the Secure and Fair Enforcement (SAFE) Banking Act passing in the lame-duck session of Congress. On that front, another Republican senator poured cold water on the latest hope for passage, after a string of disappointments recently, and really all year.

So what

Earlier this month, advocates had hoped the SAFE Banking provisions could be attached to the National Defense Authorization Act (NDAA), but that attachment was nixed by Senate Minority Leader Mitch McConnell, who didn’t want to attach any nondefense-related provisions to the bill.

Then hope turned to attaching the SAFE Act to the omnibus spending bill going through Congress now. However, on Tuesday, Republican Senator John Thune also threw cold water on that possibility, telling Bloomberg News that he doesn’t see SAFE being attached to the Senate’s spending bill, “since it divides the GOP.”

Unsurprisingly, pot stocks fell on the news. Also unsurprisingly, U.S. stocks Green Thumb and Curaleaf fell more than Canadian counterpart Canopy Growth. Canopy does have some exposure to U.S. cannabis companies, including Acreage Holdings, Wana, and Jetty, as well as an investment in TerrAscend, so it was affected as well.  

Now what

Even if SAFE Banking passes, that’s not a panacea for the ailing cannabis sector. The big needle mover would be a de-scheduling of marijuana as a Schedule I drug.

Until that happens, U.S. cannabis companies will have to deal with extremely high tax rates under Section 280e of the U.S. tax code. Under that policy, U.S. cannabis companies cannot deduct any business expenses other than plant-touching activities, which essentially means these companies are taxed on their gross margins, not their operating margins.  

That means it will continue to be almost impossible to earn material profits for these companies going forward, even if they are able to obtain lower interest rates and operating costs associated with access to mainstream banking services that SAFE would enable.

In addition, the cannabis sector has cooled off, with competition within legal states increasing, pushing down wholesale prices and lowering profitability for almost all of these companies. That’s another risk, and another reason that the sector is down so much in 2022.

It has been a highly disappointing two years for the cannabis industry, as all the optimism for reform following the 2020 election has evaporated, largely due to the 60-vote threshold in the Senate. While many Republicans are advocates for legalization, enough Republican senators have been unwilling to vote for legalization, and apparently many also feel squeamish about even passing a stripped-down SAFE Banking bill. 

While Democrats gained one seat in the Senate in November’s elections, the Republicans won a narrow majority in the House. Despite some Republicans being pro-legalization, it’s very unclear if party leadership would move a cannabis bill to a vote in the new Congress. Unfortunately, U.S. cannabis companies may have to wait even longer for reform and financial relief.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Green Thumb Industries. The Motley Fool has a disclosure policy.