Less than a week after the major Canadian cannabis companies spooked investors with weak earnings, stocks in the sector are making a rousing comeback.
Cannabis stocks appear to be rebounding from a rout that has dragged down the sector for months, following both Wednesday's historic vote in a key House committee for federal cannabis decriminalization and an optimistic note from Bank of America Merrill Lynch.
"This is just a first step," said Jason Wilson, partner at ETF Managers Group's cannabis-focused ETF Alternative Harvest (MJETF). "It's really a function of the more movement we see at the federal level, the bigger push toward legalization ー we have a 2020 election coming up ー every time we have this positive momentum, it starts to narrow or shorten the time frame investors see until federal legalization."
Canopy Growth ($CGC), Aurora Cannabis ($ACB), and Cronos Group ($CRON) all closed up 10 percent or more on Thursday. Canopy, the world's largest cannabis company, closed up close to 15 percent after two days of spectacular gains, despite reporting substantial losses in its second quarter financial report late last week. In October, many companies were trading down about 60 percent in the year since Canadian adult use sales went online, when investors learned the still developing market wasn't quite as robust as expected.
On Wednesday, Bank of America Merrill Lynch analyst Chris Carey declared "the worst looks over" for Canopy Growth. It upgraded the stock to "buy" from the "neutral" rating the bank assigned it in September, amid slowing growth in the Canadian market as it readied for Cannabis 2.0.
"To be clear, things are by no means perfect. Canopy remains a show-me story with much to prove and a new CEO still ahead. However, the worst looks over and, if momentum returns, the market may again contemplate what Canopy could become," Carey wrote in a note to investors.
Following his note, the House Judiciary Committee voted in favor of a bill that would decriminalize cannabis on the federal level if made into law. The Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act of 2019 passed through the House Judiciary Committee 24-10 on Wednesday, and in so doing marked the first time in U.S. history Congress has considered legislation that would loosen federal restrictions on cannabis. Even its sponsors acknowledge that the bill is "part of a long-term fight," but whether or not it passes, the progress alone was enough to get investors excited again.
"Generally speaking, I think it's a good time to buy. We spoke to a number of investors who have the same view and they tend to be taking these dips as an opportunity to buy at what they perceive to be a reasonable price,'" Wilson said.
Most major cannabis companies outperformed ETFMG Alternative Harvest ETF, which closed up just over 8 percent on Thursday. The exchange-traded fund, contains 38 holdings, some of them ancillary companies that do not touch the plant or companies that draw only a portion of their revenue from cannabis. Wilson said those varieties did not benefit quite as much. ScottsMiracle-Gro ($SMG), for example, closed up 1.3 percent.
Cannabis stocks also outperformed the broader market. The Dow Jones Industrial Average, S&P 500, and Nasdaq all closed down about 0.2 percent.
