After struggling severely over the past year, cannabis stocks finally received a reprieve, popping conspicuously higher on Thursday. Specifically, sector players Tilray (NASDAQ:TLRY) spiked up over 8% in late-afternoon trading, while Canopy Growth (NASDAQ:CGC) gained around 3%. Undergirding sentiment was the reintroduction of a bipartisan banking bill that could reform and essentially legitimize the cannabis industry.
According to TipRanks contributor Vince Condarcuri, the Secure and Fair Enforcement (SAFE) Banking Act “has a goal to offer crucial banking and financial services to legitimate marijuana businesses while also protecting banks that collaborate with them from federal backlash.”
In particular, Democratic Senator Jeff Merkley believes the legal cannabis sector must transition away from an exclusively all-cash model. Merkley asserts that such a framework encourages robbery, money laundering and organized crime.
Condarcuri further states that “[w]ith the bill’s reintroduction, there’s now a clear route for the SAFE Banking Act to make its way through the Senate Banking Committee and ultimately be voted on in the Senate.”
Naturally, cannabis stocks bounced higher on anticipation of a major legal breakthrough. However, investors must also exercise caution. As MarketWatch stated, “The legislation has been passed by the House seven times but has yet to win Senate approval.”
Cannabis Stocks Need a Political Lifeline
Although the legal marijuana industry has made impressive progress — that Wall Street discusses cannabis stocks is a testament to that fact — the sector also faces significant hurdles. Indeed, the cannabis industry represents one of the most ambiguous market sectors available.
To provide a brief background, the Agriculture Improvement Act of 2018 contained largely mundane specifications for anyone outside the agricultural sector. But for cannabis stocks, the bill — which former President Donald Trump signed into law on Dec. 20, 2018 — provided a new statutory definition of “hemp” or basically cannabidiol (CBD).
Most critically, hemp cannot have more than 0.3% of tetrahydrocannabinol (THC), the psychoactive component of marijuana. Now, according to the Drug Enforcement Administration (DEA), marijuana is a Schedule I substance. Given the severe penalties associated with violating federal narcotics law, financial institutions lack positive incentive to support cannabis businesses.
However, the updated SAFE Banking Act for the first time extends safe-harbor provisions to community development financial institutions (CDFIs) and to minority depository institutions (MDIs). Essentially, the measure seeks to legitimize the industry through institutional protections, addressing a key source of ambiguity. Therefore, cannabis stocks popped on the implication of future funding opportunities.
Why It Matters
Nevertheless, debate rages about the likelihood of the new SAFE Act passing. Height Capital Markets analyst Benjamin Salisbury sees only a 10% to 15% chance of success, citing past opposition from Senate minority leader Mitch McConnell and other Republicans, per MarketWatch.
On the other hand, Jefferies analyst Owen Bennett has a far more optimistic view. Fundamentally, Bennett cites the “lack of access to institutional capital” and the consequences of legal ambiguities as historical roadblocks. Once removed, cannabis stocks may rise on the removal of the deadweight, thus reinvigorating a previously moribund sector.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
