Why Aurora Cannabis Stock Soared 19% in Novembers First Week — After Falling 29% in October

Why Aurora Cannabis Stock Soared 19% in November\s First Week -- After Falling 29% in October
What Happened in the Stock Market Today
Its been a head-spinning 24 hours in the news cycle, particularly for investors in the scorching-hot but often volatile cannabis sector.

In the past two days, Michigan became the first state in the Midwest to legalize recreational marijuana. Bright red Utah and Missouri voted to legalize medical marijuana. And two of marijuanas staunchest opponents in Washington, Rep. Pete Sessions and Attorney General Jeff Sessions, were kicked to the curb.

Marijuana Stocks Spiked After Jeff Sessions Resigned

The Canadian marijuana producer Tilrays stock has been on wild a ride, gaining over 30% immediately after Sessions announced he was stepping down on Wednesday. The stock has since fallen over 12% during trading on Thursday, perhaps due to confusion over where Sessions replacement, acting Attorney General Matthew Whitaker, stands on marijuana.

Exchange-traded funds that track pot shares also gained, with the U.S.-listed ETFMG Alternative Harvest ETF jumping 6 percent. As Jeff Carbone, managing partner at Cornerstone Wealth, put it: “The cannabis stocks will be partying this evening like its 1999 given the firing of Sessions today.”

Marijuana stocks up after Jeff Sessions resigns

Read more: Marijuana companies are using a backdoor strategy to tap the public markets — and its fueling an M&A boom

To Todd Harrison, the founding partner of CB1 Capital, a cannabis-focused hedge fund, these huge swings in the cannabis sector are just a sign of “shaking out the weak hands” and putting the shares in “firmer accounts.”

All this has led the many cannabis bulls to predict that there will be some federal movement in the US on marijuana legalization — or at least to allow cannabis companies to access regular banking services — in the near future.

Canopy Growth and Aurora Cannabis, two other publicly traded Canadian pot companies, both rallied more than 8 percent. 

Paul Rosen, the CEO of Tidal Royalty, a Toronto-based firm that provides financing to US cannabis firms, said pending legislation like the bipartisan States Act — cosponsored by Sens. Elizabeth Warren and Cory Gardner — was the most likely path for the federal government to clarify its position on the patchwork of state-legal cannabis industries.

If passed, the States Act would exempt states that have legalized marijuana from the Controlled Substances Act, effectively removing a conflict between state and federal law. The bill would also clarify rules around banking and tax deductions, allowing cannabis to operate like any other industry.

And this, said Brady Cobb, an attorney who is the CEO of SOL Global Investments, is what would let big institutions — like BlackRock and Goldman Sachs — “jump headlong” into the US cannabis operators.

Read more: A competitor is emerging to challenge the marijuana retail chain dominating the industry, and it just closed a $640 million acquisition

Harrison said that Sessions stepping down was “positive on the margin” for weeds expansion in the US but that clarity around banking rules was the more “meaningful catalyst” for the cannabis industry.

BlackRocks president, Rob Kapito, said last week that his firm “will be investing” in the cannabis industry, but because most bank custodians wont clear cannabis stocks, itd have to wait.

The first likely targets for institutional investors are the billion-dollar retail cannabis companies that operate in multiple state markets, like MedMen and iAnthus, according to Morgan Paxhia, managing partner at cannabis-focused hedge fund Poseidon Asset Management.

Big institutions are “stuck with the law of large numbers,” Paxhia said. They have to focus on deals worth hundreds of millions that will actually “move the needle” on their balance sheets, he added.

“In the context of 30,000 years of humanitys relationship with cannabis, 90 years of propaganda is like a pimple on an elephants ass,” Harrison said. “The best catalysts are still in front of us.”

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With the midterm elections resulting in a divided Congress, investors celebrated the likelihood that major policy changes may not be forthcoming anytime soon, triggering a powerful and broad-based rally in stocks Wednesday. The Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) opened higher and rose throughout the session, fueled by gains in growth stocks.

All sectors rose, with healthcare stocks in particular climbing on the prospect of gridlock in Washington; the Health Care Select Sector SPDR ETF (NYSEMKT:XLV) jumped 2.9%. Consumer discretionary stocks also had big gains after being hit hard last month, with the Consumer Discretionary Select SPDR ETF (NYSEMKT:XLY) closing up 2.7%. 

The passage of state marijuana initiatives produced renewed interest in the stocks of producers of cannabis, which had taken a breather last month after making some spectacular gains earlier in the year. Canadian pot producer Tilray (NASDAQ:TLRY) had a particularly good day, climbing 30.6%, while cannabis peers Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB) saw gains of 8.2% and 9.2%, respectively.

Marijuana initiatives passed in three states yesterday, giving a boost to the stocks of several cannabis producers. Michigan became the 10th state to legalize adult recreational use of the drug, and Missouri and conservative Utah approved medical marijuana use. Late in the trading day, breaking news about the resignation of Attorney General Jeff Sessions, a vocal opponent of pot legalization, added further momentum to the stocks.

Michigans Proposal 1 makes that state the first in the Midwest to legalize recreational use of the drug for people 21 and older, with sales subject to a 10% excise tax. State authorities will determine when retail sales can begin, and that may be a year or more in the future. Utahs Proposition 2 legalizes marijuana use by people with qualifying medical conditions, but doesnt allow consumption by smoking. Missouri voters cast ballots on three different measures, approving one for medical marijuana with a 4% tax that will go to healthcare benefits for veterans.

It wasnt a win across the board for marijuana proponents. North Dakota voters defeated Measure 3, which would have legalized adult recreational use and expunged records of people convicted of having used drugs that were later legalized.

Tilray, Canopy, and Aurora arent likely to benefit immediately from the initiatives, with the U.S. federal prohibition of marijuana inhibiting the ability of Canadian cannabis companies to export products to the U.S. market. But investor demand for marijuana stocks remains high. Moreover, the small number of shares available and the high short interest make Tilrays stock in particular very volatile. Coming on the heels of legalization in Canada last month and recent polls showing support for a similar move in this country, there was enough positive news to make investors jump into these somewhat speculative marijuana stocks.

Jim Crumly has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Jim bought his first stocks in 1967 with paper route money and has been invested in equities ever since. Hes still learning, though, and enjoys studying and investing in a wide variety of businesses. He has a BS and MS in electrical engineering from Stanford University, and retired after 34 years with a large technology company.

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