Why Aurora Cannabis, Canopy Growth, and Tilray Stocks Bounced Today

What happened

Marijuana stocks opened higher on Monday — and granted, with stock markets glowing green across the board, it looks like pretty much everything opened higher. But for Canopy Growth (CGC -0.79%), Tilray (TLRY -1.04%), and Aurora Cannabis (ACB 0.62%) — up 7.9%, 7.5%, and 6.7%, respectively, as of 1 p.m. ET — there was actually a bit of industry-specific optimism backing up their rally.

On Friday, Lester Black, a journalist who has covered the cannabis sector for many years, predicted in a column on the data-centric news site FiveThirtyEight that marijuana might very well be decriminalized “by the end of [President Biden’s] current term in office.”

So what

As you can imagine, this prediction was music to marijuana investors’ ears — maybe not immediately, in the middle of Friday’s stock market sell-off — but certainly on Monday as the market began to stabilize. As Black explained, President Biden’s order for the U.S. government to “expeditiously” review the case for rescheduling marijuana from a Schedule I drug to a less restrictive level is something less than a move for full-scale legalization — but also “more than just an empty gesture.” In fact, he said, it has “triggered a process that could end federal pot prohibition as we know it.” 

Maintaining marijuana’s Schedule I status — which is meant only for drugs that are exceptionally dangerous and have no valid medical uses — “makes no sense,” President Biden said.

Black called this a “unique … and powerful” statement that implies that Biden wants rescheduling of the drug to happen “quickly.”

All that being said, what might constitute “quickly” is open to interpretation. According to Black, rescheduling is usually a long, drawn-out process. First, the Food and Drug Administration must conduct a scientific evaluation of the drug, which is then sent to the secretary of Health and Human Services for review. After that, the secretary makes a recommendation to the Drug Enforcement Administration (DEA). Eventually, the final decision rests with the attorney general, who as head of the Justice Department has the DEA under his purview. That’s already a somewhat convoluted process, and as Black points out, “there are many ways Biden’s scheduling directive could fail” along the way.

Now what

Ultimately, Black still concludes that legalization may happen sooner than some might think — but that might not help marijuana investors out much. As The Wall Street Journal observed in a column also published Friday, “legal grass isn’t always greener for cannabis companies,” as the example of marijuana legalization in Canada illustrates.  

Describing Canada’s cannabis industry as being in “a pitiful state” four years after legalization, The Wall Street Journal’s Carol Ryan notes that investors who piled into Canadian cannabis companies “have been razed.” Aurora, Tilray, and Canopy Growth, by the way, are all based in Canada, and Ryan notes that Canadian marijuana stocks have collectively lost 85% of their value over the last few years as legalization permitted hundreds of companies to enter the market, cutting marijuana prices in half, and cutting profit margins as well.

Granted, it’s possible that legalization in the much larger U.S. market might enable marijuana companies to “make it up on volume,” as the old saying goes. But recall that the full version of that joke is: “We lose money on every sale, but we make it up on volume.” That’s not a sustainable business model.

After watching Aurora Cannabis, Tilray, and Canopy Growth lose money for four straight years selling legal weed in Canada, I have serious doubts they would do any better in a post-legalization U.S. market.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.