There's nothing that can light a fire under marijuana stocks quite like hype around legalization or any kind of reform in the sector. When the Democrats won the run-off Senate elections in Georgia in early January, giving them control of both the House and Senate, shares of the Horizons Marijuana Life Sciences ETF jumped 8% the following day (the S&P 500 was up around 0.6%).
At the time, there was excitement only for the possibility that reform might happen as a result of the Senate results. If there are actual changes, the bullishness could reach a whole other level. And while marijuana legalization may not happen anytime soon, the passage of the Secure and Fair Enforcement (SAFE) Banking Act could be on the horizon.
Image source: Getty Images.
The SAFE Banking bill passes the House for the fifth time
The SAFE Banking bill isn't new; this month, it obtained approval from the House for a fifth time. Lawmakers first gave it the go-ahead in 2019.
The bill would make it permissible for financial institutions and other types of organizations to do business with marijuana companies without having to worry about potential legal consequences. While it's not impossible for marijuana companies to open up bank accounts at small financial institutions or credit unions, it's difficult to do so, and they still won't have the same access to banking services that businesses in other sectors do given the federal ban on pot. It's also more cumbersome for financial institutions, as they need to fill out suspicious-activity reports on an ongoing basis. Many large banks stay clear of the industry altogether out of fear of repercussions from the federal government.
Will the bill finally receive full approval?
This latest action on the bill comes as it has been included as an amendment to the National Defense Authorization Act (NDAA). Although the NDAA is a defense bill that is unrelated to marijuana, SAFE Banking was nonetheless included in hopes of passing some much-needed marijuana reform. NDAA made it through the House easily with 316 votes in favor and only 113 opposed.
Attaching the bill to the NDAA gives the SAFE Banking bill more of a chance to pass. In April, the House passed the bill but it ultimately went nowhere -- not due to a lack of support but because Senate Majority Leader Chuck Schumer's priority is on more-significant marijuana reform, which includes outright legalization. That will undoubtedly be a more complex piece of legislation to pass, but it's the latest reason the SAFE Banking bill has struggled of late. The inclusion into the NDAA could give it much better odds for success, although that's still not a guarantee as it could again face resistance in the Senate.
However, this is probably the best chance the bill has at passing the Senate. If it fails or gets pulled out of the NDAA, that doesn't mean marijuana reform isn't coming, only that the Democrats likely don't want to be content with modest changes in the sector.
Many stocks could soar on the news
If the SAFE Banking bill passes, all pot stocks could instantly get some renewed bullishness. In the past six months, while the S&P 500 has risen 12%, the Horizons Marijuana Life Sciences ETF has crashed more than 30% as a lack of a progress on legalization likely discouraged many growth investors. Shares of top multi-state operators (MSOs) Trulieve Cannabis (TCNNF 1.41%) and Curaleaf Holdings (CURLF 4.67%) fell 40% and 20%, respectively. Although both companies are dominant businesses and have combined for $1.7 billion in revenue over the past 12 months, the industry has been lacking a catalyst of late to push share prices higher. The banking bill could be that catalyst.
For Curaleaf, easier access to banking could help with its rapid expansion. Not only is the MSO looking to expand into new recreational marijuana markets like New York State and New Jersey, which could open up for business as early as next year, but the company also launched Curaleaf International, a new business aimed at penetrating the European market. Having easier access to funding from big banks could help the company avoid relying on issuing new shares to raise money while also minimizing the need to tap into its cash.
Trulieve is heavily dependent on Florida for its success, but it also is looking at other markets to diversify its operations. It recently obtained a production license in Georgia, which marks the seventh state it has a presence in (although that doesn't mean it's operating in every one of them). In Massachusetts, the company just launched its first dispensary this past quarter, which ended June 30.
Trulieve and Curaleaf are a couple of examples of marijuana businesses that would benefit from passage of the SAFE Banking Act since that could make their operations a whole lot easier. Plus, if cannabis investors see some tangible evidence that marijuana reform is here and on the horizon, that could rejuvenate pot stocks and lead to a wide-scale rally. Investing in the sector ahead of any major news like this could be a great move that leads to significant returns.
