Marijuana investors are disappointed on Wednesday as a stock market rally that roared earlier in the week begins to falter. Starting at 12:05 p.m. ET, the two canopy growth (CCG -4.14%) and Aurora Cannabis (PBR -3.91%) are down about 5.5%, while Tilray Brands (TLRY -2.33%) suffers a lesser loss of 3.5%.
In part, this selloff is just a function of the general decline in equity markets today – but it turns out that marijuana stocks may have their own problem.
As you surely know by now, there is an ongoing movement in Congress to legalize marijuana nationally. Things haven’t gone smoothly – President Joe Biden, for example, still seems opposed to the idea. But overall, even conservative lawmakers in Congress proper seem to largely agree with the idea of legalizing weed in some form.
But maybe not in everything shapes.
As Marijuana Moment reported yesterday, the 156-member House Republican Study Committee (about 35% of Congress) just released a report blaming state-level marijuana legalization as “an explosion marijuana use among children. The RSC recommends that, whatever happens with the legalization of marijuana in general, the production and sale of edible marijuana products “in the form of candies or drinks” remain prohibited if there are “reasonable grounds to believe” that they will be sold to minors. Similarly, the industry site reports that about a quarter of members of the US Senate support passing legislation to protect children from candy-flavored drugs.
Now here’s why this should worry marijuana investors: According to a 2018 report on the financial website Grizzle, while marijuana in general is a product that generates high gross profit margins (if not high net margins), the more profitable form of retail marijuana, by far, is edible. In 2018, gross margins on dried marijuana flower were 76%, cannabis extract 84%, and edibles 92%.
Admittedly, these figures were calculated on the basis of old data. According to data from Statista, the cost of producing dried cannabis has dropped significantly to around $1.04 per gram from $1.79 per gram in the Grizzle report. But all other things being equal, this should not affect the relative profitability of one form of retail marijuana over another, in which case it would appear that Congress’ intent is to prohibit the sale of the form. most profitable marijuana. — even if other forms of cannabis offered for sale become legal.
The logical effect of such a move would be to weaken the gross profit margins of major marijuana companies like Canopy, Aurora and Tilray. And that means that even if the marijuana in general is legalized at the federal level, if Congress maintains a ban on edible sales, it could prevent or delay the profitability of marijuana businesses.
In short – and at the risk of mixing up some metaphors – just as marijuana investors are beginning to see a light at the end of the legalization tunnel, Congress can snatch defeat from the jaws of victory and ensure that the marijuana remains an unprofitable business for the foreseeable future.
No wonder marijuana investors are feeling let down today.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.