Did Joe Biden Just Save Cannabis Stocks?

The stock market closed lower on Thursday, with losses of around 1% for the Dow Jones Industrial Average (^DJI 0.56%) and S&P 500 (^GSPC -0.88%). The Nasdaq Composite (^IXIC -2.05%) fared slightly better, but the move lower gave up some of the big gains from earlier in the week. Early Friday, stock index futures suggested a flat opening.

Data source: Yahoo! Finance.

The big news from Thursday came in the cannabis sector, where marijuana stocks soared after a long-awaited announcement from the White House. Yet even as major cannabis companies saw their share prices climb, the fundamental challenges their businesses face remain the same. Investors will have to see signs that cannabis giants can overcome those challenges in order to see lasting returns on their investments.

Pardon for marijuana possession offenders

President Joe Biden released a statement Thursday that cannabis investors have been hoping to see for a long time. Biden revealed a three-pronged approach intended to enact his view of marijuana reform. First, the president announced a pardon of all federal crimes related to simple marijuana possession. Second, Biden urged state governors to offer similar clemency with respect to marijuana-related crimes at the state level. And last, the White House will ask the Secretary of Health and Human Services to look more closely at how marijuana is scheduled as a controlled substance under federal law, presumably with the idea of either removing it completely or at least moving it to a less severe category.

Predictably, marijuana stocks soared on the midafternoon announcement. Tilray (TLRY 0.58%) jumped more than 30%, while Canopy Growth (CGC 1.28%) climbed 22%. Aurora Cannabis (ACB -1.15%) settled for a 7% gain, but other companies saw some sizable gains as well, including a 33% rise for Curaleaf Holdings (CURLF -2.56%) and a 14% gain for Cronos Group (CRON -1.66%).

Will investors see results?

Marijuana investors have hoped that the federal government would legalize cannabis. Even with Washington tacitly allowing states to choose whether to allow marijuana for medical or recreational purposes within their own borders, investors remained uncomfortable with the conflict of laws at the federal and state levels. Aligning federal law with the current treatment of marijuana will raise certainty, and it could also make certain aspects of operating cannabis-related businesses easier in areas like banking.

Yet cannabis stock fans shouldn't get ahead of themselves. It's entirely possible that a federal legalization of marijuana will still allow states to have laws to the contrary, which would mean the current patchwork of states with legal cannabis would stay in place.

Moreover, even full legalization wouldn't necessarily solve all the problems cannabis companies face. For instance, Tilray released its fiscal first-quarter results Friday for the period ending Aug. 31, and the numbers were mixed. Revenue was down 9% to $153 million, and despite a sizable drop in operating expenses, Tilray continued to lose money and failed to meet its shareholders' expectations. Even though Tilray's 8.5% share of the Canadian cannabis market leads the industry, the fact that the figure is so low speaks to the fragmentation of the marijuana space and the difficulty companies have had in establishing brand dominance.

Given how far marijuana stocks had fallen, a bounce on legalization hopes was warranted. But Biden's announcement won't save cannabis companies by itself. In order to keep up their positive momentum, cannabis companies will have to find ways to take full advantage of all their opportunities both in the U.S. and around the world. Anything less than that could lead to further disappointment for marijuana investors.