Cannabis stocks soared in popularity at the end of the last decade. Two of the companies that led this rally were Canopy Growth (CGC 1.87%) and Aurora Cannabis (ACB 1.39%). However, both pot growers, along with the rest of the sector, have been southbound for the past five years. Recent developments could change that, though, at least that's what some are hoping. Let's look into what's going on in the industry and determine whether Canopy Growth and Aurora Cannabis have attractive prospects.
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A significant regulatory milestone
President Trump recently signed an executive order that rescheduled cannabis from a Schedule 1 substance to Schedule 3. Here's what that means. Controlled substances are put into one of five categories based on how dangerous and prone to abuse they are, as well as whether they have any accepted medical uses. Up until recently, cannabis was in the most restricted category, along with heroin and other extremely dangerous drugs.
Thanks to Trump's decision, though, it will now be a Schedule 3 drug, which means it has some accepted medical benefits and is far less prone to abuse than those in the two categories above.
NASDAQ: CGC
Key Data Points
For cannabis companies operating in the U.S., it also means easier access to banking services and the ability to deduct normal business expenses as most other companies do. Perhaps this change could also boost demand for cannabis products in the country. For pot growers, this will mean higher revenue, lower expenses, and stronger profits. It's no wonder some investors are getting excited. However, in my view, this won't significantly boost Canopy Growth and Aurora Cannabis' prospects.
Investors should temper their expectations
Despite this milestone, it's important to point out that cannabis remains illegal at the federal level. Interstate commerce is still not permitted, which complicates matters for pot growers. Further, Aurora Cannabis does not have a cannabis retail or distribution business in the U.S. The company could potentially enter the market quickly, perhaps through acquisitions, and hit the ground running. That's one way in which it has increased its market share in Canada, where it is based. But the Canadian experience has taught us that even full-blown legalization is no guarantee of success.
NASDAQ: ACB
Key Data Points
Aurora Cannabis' financial results have been subpar for years -- and it still generates a loss -- despite its relatively prominent status in its home market. Why expect it to succeed in the U.S., where legalization hasn't even happened yet? True, the U.S. could be a far bigger market, if for no other reason than its population size. That also means it could attract far more players, some of which would be in a better position to profit from these developments than Aurora Cannabis.
What about Canopy Growth? It has a more direct connection to the U.S. cannabis space through its subsidiary, Canopy USA. However, even with this advantage, it will still face similar problems, including unfavorable federal laws and stiff competition. In short, neither stock seems worth investing in today, despite the recent win for the cannabis industry.
