Last week, cannabis stocks jumped on news that President Joe Biden was issuing pardons for thousands of people who have been convicted of simple marijuana possession in federal court, and said that the government would begin a review of how pot is legally classified. Currently, it's a Schedule 1 substance like heroin, so legally, it is treated as a highly dangerous drug that has no acceptable medical uses. Biden also urged governors to pardon people convicted of marijuana possession at the state level.
These were huge developments in the cannabis reform narrative, and the most significant signs yet from the Biden administration that marijuana reform -- and possibly even legalization -- could be on the horizon.
While legalization would open up opportunities for all cannabis companies, some are better positioned to gain than others. Here's a look at some of the different positions those companies are in and what legalization might mean for them.
Cannabis companies with pending deals with U.S. companies
Some Canadian cannabis producers have preemptively inked acquisition deals for U.S. companies that will remain on hold until and unless pot is federally legalized. But as soon as legalization occurs, those deals can be executed at once. These are the stocks that will have the most to gain in the short term if and when legalization takes place.
Arguably, the Canadian company best positioned for legalization is Canopy Growth (CGC -0.66%). The cannabis producer first arranged a deal contingent on marijuana legalization in the U.S. back in 2019, when it announced it would merge with Acreage Holdings. That multi-state operator (MSO) has 27 dispensaries in 10 states, and buying it would give Canopy Growth an instant presence in the U.S. market. Canopy Growth has other similar contingent deals to acquire edibles maker Wana Brands and take a stake in MSO TerrAscend.
Cannabis producer Tilray Brands (TLRY) also has a lot to gain from U.S. legalization. Last year, the Canadian company acquired convertible notes in the MSO MedMen Enterprises. Once legalization happens, Tilray can convert those notes into shares and take a minority position in MedMen. However, at the time of the announcement, Tilray CEO Irwin Simon hinted that the deal could lead to it taking a much larger position in the business. "Ultimately, once legalization happens, it gives us the potential to own a great company that we can ultimately take into the rest of the world," he said. MedMen currently operates in six states and has more than 25 locations.
MSOs will gain greater flexibility
Due to all the wheeling and dealing by the companies noted above, it can be easy to overlook the MSOs currently operating in the U.S. But make no mistake, stocks such as Cresco Labs, Curaleaf Holdings, and Trulieve Cannabis have potentially even greater upsides.
If legalization takes place, those businesses will be able to more easily access banking services, obtain loans, and expand organically. They would be able to move their products across state lines, and expanding into a new state would no longer require them to acquire a company that was already operating there.
Also, MSOs would be able to list their stocks on major exchanges such as the NYSE and Nasdaq. That would give them more visibility to investors and their shares would be more liquid -- both huge benefits.
Lastly, upon legalization, big pharma and big tobacco companies would be able to acquire MSOs, which isn't something that's feasible today.
These stocks may not stand to benefit as much
Then there are the companies that aren't operating in the U.S. and that won't be ready to jump quickly into the domestic market following legalization. Aurora Cannabis and SNDL fall into that category, and investors shouldn't expect their shares to take off should the U.S. legalize pot.
In the case of Aurora, it has been focusing on the medical marijuana market, and although it did acquire Reliva, a U.S.-based hemp-focused, in 2020, that pales in comparison to the positions of Tilray and Canopy Growth. Aurora may benefit from U.S. legalization, but it likely won't have a significant impact on its business.
For SNDL, the focus has been on expansion within Canada and diversifying its business there. Changes in the U.S. would have a limited immediate impact on it.
Marijuana legalization would help many pot stocks, but not all of them are buys
If and when marijuana legalization takes place, plenty of pot stocks should surge in value. However, investors who are bullish on legalization shouldn't assume that such a change would bring more prosperity to every player in the space.
The best bet for those seeking exposure to the space would be to invest in top MSOs such as Curaleaf, Cresco Labs, or Trulieve Cannabis. Legalization will simplify their operations and make their shares more accessible. While Canadian-based companies Canopy Growth and Tilray Brands would definitely benefit from legalization, I'm not convinced of the quality of the deals they have made. (MedMen and Acreage are much riskier and smaller than the big MSOs in the U.S.)
It's also important to remember that -- recent news notwithstanding -- it's still far from guaranteed that cannabis legalization (or even major reform) will happen in the U.S. anytime soon. Legislation takes time to develop and work its way through Washington. So if you decide to buy shares of any of these companies based on the hope that marijuana will become federally legal, you'll need to be prepared to wait for that bet to pay off.
