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Why Marijuana Stocks Were Smoking on Friday

By Rich Smith – Dec 17, 2021 at 5:32PM

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And how things could still go horribly wrong.

What happened

Cannabis stocks took off like a rocket Friday -- and on a most curious catalyst.

Early this morning, analysts with investment bank Piper Sandler lowered their price target on Tilray (TLRY 3.20%) stock -- but only to about $8 a share, or a couple percentage points above where it closed Thursday. Thus, what should have been a negative news item for Tilray (and indeed, what began with Tilray stock down for the day) turned into a positive catalyst for Tilray, which ended the day just a couple pennies shy of $8.

Other marijuana stocks reacted positively as well, with Sundial Growers (SNDL 1.95%) gaining 2.6% by close of trading, Canopy Growth (CGC) growing 4.9%, and Charlotte's Web (CWBHF 2.16%) spinning 8.7% higher.

Burning red marijuana joint.

Image source: Getty Images.

So what

Helping to keep the momentum going today was a report on, which highlighted the prospects for progress on marijuana legalization in 2022. According to MM, the Democrat-led "Congressional Cannabis Caucus" is optimistic that "Congress is primed for progress in 2022" and will pass legalization in the House of Representatives (where it's already passed a committee vote) and then move on to pass in the Senate as well (where it remains stalled).

"We are poised to take bold action to end the failed war on drugs once and for all," declares the memo, and marijuana investors appear to be taking 2022 passage of legalization as a given.

Now what

And yet, there's one fly in the CBD ointment: Legalizing marijuana at the federal level may not be enough to turn marijuana into a viable business.

In a separate report out today, this one on, "a broad group of cannabis industry leaders" is said to have penned a letter to California Governor Gavin Newsom warning that that state's "unwillingness to effectively legislate, implement, and oversee a functional regulated cannabis industry has brought us to our knees." California marijuana businesses are therefore asking Newsom to: increase the number of marijuana retailers within the state (helping to grow sales), suspend the state's 15% cannabis excise tax for a term of three years, and eliminate entirely the state's marijuana cultivation tax.

Failure to do so, warn the businesses, will require them to choose between paying "exorbitant taxes into a system designed for failure or pay employees so they can feed their families." And suffice it to say, if this is the state of the marijuana industry in one of the most marijuana-friendly states of the Union, it's hard to see how mere legalization of the drug will be sufficient to turn marijuana companies like Tilray, Canopy Growth, Sundial, and Charlotte's Web -- all of which are unprofitable today -- into profitable businesses in the future.

To the contrary, if legalization at the federal level adds more taxes to the companies' burden (and it will), the situation for the marijuana industry could actually get worse under federal legalization than it already is under ad hoc state legalization, and a continuing federal ban.

I know that's not what marijuana investors want to hear on an "up" day for their stocks, but if marijuana companies are worried, then perhaps marijuana investors should start worrying about this, too.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Charlotte's Web Holdings. The Motley Fool recommends Charlotte's Web. The Motley Fool has a disclosure policy.

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