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Cannabis stocks rally after Chuck Schumer leads drive for reforms that may end federal prohibition

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Cannabis stocks were mostly higher Tuesday after three Democratic senators led by Majority Leader Chuck Schumer said they would make reform legislation a key priority in the current Congress, bolstering hopes for an end to federal prohibition.

Schumer, along with Sens. Ron Wyden of Oregon and Cory Booker of New Jersey, said in a joint statement that they would introduce legislation in the coming weeks.

“The War on Drugs has been a war on people—particularly people of color. Ending the federal marijuana prohibition is necessary to right the wrongs of this failed war and end decades of harm inflicted on communities of color across the country. But that alone is not enough,” they said. “As states continue to legalize marijuana, we must also enact measures that will lift up people who were unfairly targeted in the War on Drugs.”

The statement comes after a strong rally in the sector, driven by optimism that the new administration of President Joe Biden would pursue an agenda of reforming the U.S.’s strict cannabis laws, which continue to classify the substance as a Schedule I drug, alongside heroin.

That classification has hampered the development of the sector, which is confined to those states that have legalized cannabis for medical or recreational use and kept companies locked out of the federally insured banking system.

Jefferies analyst Owen Bennett said that while Schumer has made encouraging noises in the past about overhauling the laws, the latest move is the first time lawmakers have made a formal commitment. The past roadblock — Republican Sen. Mitch McConnell of Kentucky — has been removed with the Democratic takeover of the Senate, he said.

“With cannabis legalization having overwhelming public bipartisan support, many Republican states already legalizing cannabis, potential tax revenue, and Schumer last week saying the newly planned bill already has support from ‘some Republicans,’ we think (there’s) a strong chance of (it) advancing to Biden’s desk.

See also: New York is finally expected to legalize cannabis in 2021 as Gov. Cuomo goes all in

“Importantly, while Biden has previously been against full legalization, he has said he supports allowing the states to decide, which looks to be the form that any newly proposed legislation would take,” Bennett wrote in a note to clients.

The analyst noted that Vice President Kamala Harris supported last year’s MORE Act (Marijuana Opportunity, Reinvestment, and Expungement Act), a bipartisan bill that was approved in the House but died in the Senate.

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That would suggest that any pending legislation will include safe-harbor language for banking, enable companies to uplist to established U.S. exchanges and crack open the capital markets to institutional funding, all factors that current legislation has prevented.

“With any legislation likely to remove these barriers, expect a huge inflow of institutional money which is likely to send US sector valuations materially higher,” Jefferies’ Bennett wrote.

Canaccord analyst Bobby Burleson said he expects the MORE Act and the SAFE Banking Act (Secure and Fair Enforcement Act) to form the basis of new federal leglisation. The SAFE Act was also passed by the House more than 16 months ago, but failed to gain traction in the then Republican -led Senate.

“With the Democrats now able to better control the flow of legislation through the Senate, we believe the prospects of cannabis operators being able to access more traditional forms of capital could help decrease the overall cost of capital and increase the operating efficiency of the sector as whole,” Burleson wrote in a note to clients.

Against that background, the Cannabis ETF
THCX,
+6.77%

was up 6%, with 29 of its 30 component stocks gaining ground.

Among individual stocks, Tilray Inc.
TLRY,
+18.12%
,
which is merging with Aphria Inc.
APHA,
+12.17%

APHA,
+12.53%
,
was up 16%, while Aphria was up 11%.

Aurora Cannabis Inc.
ACB,
+11.26%

ACB,
+10.96%
.
, one of the most widely held cannabis stocks thanks to its popularity with Robinhood traders, was up 10%. Canopy Growth Corp.
CGC,
+5.35%

WEED,
+5.33%

was up 6% and Cronos Group Inc.
CRON,
+11.47%

CRON,
+10.64%

was up 12%.

Read: As pot stocks boom on hopes for U.S. legalization, Canadian cannabis companies struggle for growth

Sundial Holdings Inc.
SNDL,
-13.22%
,
a penny stock that once boasted a $1 billion valuation, was down 11%, after unveiling another dilutive capital raise.

The company has now fully used up its shelf registration, meaning it will have to file a new one to issue any new securities.

Among U.S. companies, Curaleaf Holdings Inc.
CURLF,
+3.92%

CURA,
+5.36%

was up 4%, Cresco Labs Inc.
CL,
+6.45%

CL,
+6.45%

was up 6% and Green Thumb Industries Inc.
GTII,
+4.46%

was up 4%. Akerna Corp.
KERN,
+11.14%
,
which makes software for the cannabis industry, was up 5%.

The Cannabis ETF has gained 46% in the year-to-date, while the S&P 500
SPX,
+1.70%

has added 2%.

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