President Trump once ranked his own The Art of the Deal as his second favorite book. However, he just might have learned something about the art of the deal from Sen. Cory Gardner (R-Colo.).
Sen. Gardner vowed to block all of the president's nominees to the U.S. Department of Justice in January. This move came after Attorney General Jeff Sessions overturned the Obama administration policy that prevented federal law enforcement officials from interfering in states that had legalized marijuana. In 2012, Gardner's home state of Colorado voted to legalize recreational use of marijuana.
The tactic appears to have paid off. Last week, Trump reached an agreement with Gardner that could mean states like Colorado can breathe easier. Does Trump's deal now provide the fuel for marijuana stocks to skyrocket?
Trumping Jeff Sessions
Marijuana businesses and supporters were leery of Trump's pick of Jeff Sessions as attorney general from the outset. Sessions has been a longtime opponent of marijuana, once stating that "good people don't smoke marijuana."
Sessions' move to rescind previous Obama administration policies that left enforcement of marijuana laws largely to individual states wasn't a surprise in light of his previously stated views. That move was, however, surprising to Sen. Gardner. According to Gardner, Sessions had assured him that enforcing federal marijuana laws wouldn't be a priority for the Trump administration.
Now, though, it appears that the president has overridden his attorney general. Gardner announced that President Trump committed that the federal government wouldn't challenge Colorado's state laws allowing marijuana use. Even more importantly, Gardner said that the president pledged to support "a federalism-based legislative solution to fix this states' rights issue once and for all."
Sen. Gardner has already begun working with fellow senators in both major political parties on legislation to prevent the federal government from interfering with state laws allowing marijuana. He also is co-sponsoring a bill with Sen. Rand Paul (R-Ky.) and Sen. Ron Wyden (D.-Ore.) to reform tax laws on marijuana businesses.
Good news for marijuana stocks
The Trump-Gardner deal lit a fire under several marijuana stocks. The biggest mover after Sen. Gardner's announcement of his conversation with the president was Aphria (NASDAQOTH: APHQF), with shares surging nearly 15%.
Why would this Canadian marijuana stock jump on U.S.-related news? Aphria stood as one of the few major marijuana growers in Canada that established significant operations in the U.S. However, the company has taken steps to reduce its U.S. exposure after the Toronto Stock Exchange threatened to delist the stocks of members with ongoing business activities that violate U.S. federal marijuana laws. Even with these steps, however, Aphria still owns 28.1% of Liberty Health Sciences, which focuses on the U.S. marijuana market.
Even Canadian marijuana stocks that don't have significant U.S. ties received a boost. The share prices of the two largest Canadian marijuana growers by market cap, Canopy Growth (CGC -2.26%) and Aurora Cannabis (ACB -0.67%), rose 7% and 8%, respectively.
Interestingly, the stock price of the one major U.S. company that stands to benefit the most from the new deal between President Trump and Sen. Gardner didn't move nearly as much as the Canadian marijuana stocks did. Scotts Miracle-Gro's (SMG -1.13%) share price increased less than 1% after the news of the deal broke. Scotts Miracle-Gro's Hawthorne subsidiary is a major supplier of products used by marijuana growers, including hydroponics and lighting systems.
Fueling longer-term momentum?
Is longer-term momentum for marijuana stocks now likely? Maybe. A lot rides on how much support the president will give to legislation that changes U.S. federal laws on marijuana.
A return to a hands-off policy by the Department of Justice when it comes to states that have legalized marijuana helps the U.S. marijuana industry, but is really only a temporary solution. As long as the threat of federal intervention remains a possibility, a dark cloud will hang over marijuana-related businesses.
However, a change in U.S. federal laws that would recognize state legalization of marijuana is a totally different story. And if regulations that restrict banks from providing services to marijuana-related businesses were lifted as well, the marijuana industry in the U.S. would be poised to explode. The implications of such changes would be enormous.
Aphria, Aurora Cannabis, Canopy Growth, and other Canadian marijuana growers would likely rush to establish large operations in the U.S. There would probably be a scramble for U.S.-based companies to list on stock exchanges, presenting more alternatives for investors who are largely limited to Canadian stocks right now. Scotts Miracle-Gro could find itself in a similar position as the companies that provided shovels to miners in the gold rushes of the past.
Again, all of this depends on just how much President Trump actually does to fulfill his promise to Sen. Gardner. The political process is filled with twists and turns. For now, the prudent move for investors is probably to wait and see what happens.