Why Pot Stocks Are Down More Than 10% Today

Canopy Growth Corp. (TSX:WEED) and other pot stocks are tanking today after developments in the U.S. put the legality of cannabis into question.

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Pot stocks continue to ride the roller coaster. Today, some bad news south of the border sent many shares reeling. In 2013, U.S. President Barack Obama announced that the federal government would not obstruct any states that decided to legalize marijuana, as long as some conditions were met, including that the drug be kept away from children and that it would not be legal to transfer it to states that hadn’t legalized cannabis yet.

Well, all that changed on Thursday when U.S. Attorney General Jeff Sessions rescinded that Obama memo. The problem goes back to the fact that at the federal level, pot is still illegal, but in some states, it has been legalized, and the previous memo assured states that the federal government would not interfere with their decisions. With that memo now rescinded, it creates a lot of legal uncertainty for both buyers and sellers of pot in those states.

Sessions effectively leaves it up to U.S. attorneys to decide to what extent federal laws will be enforced in pot-legal states. As a result of this news, pot stocks in Canada were down significantly on the news. Aphria Inc. (TSX:APH) and Canopy Growth Corp. (TSX:WEED) were both down ~12% in trading on Thursday morning, while Aurora Cannabis Inc. (TSX:ACB) also lost more than 10% of its value.

Government is going to play a big part in the success of the cannabis industry

Whether investors and other players in the industry want to admit or not, the government will play a significant role in how much the cannabis industry will be able to grow. In the U.S., we are already seeing the impact of a Republican government that still believes in the war on drugs and on fighting marijuana. Sessions is taking a very strong stance on the drug, but after the next U.S. election, we could possibly see the opposite approach if the Democrats are back into power.

Canada is no exception, and we could see the opposite impact if the Conservatives regain power. While the Liberals have not wavered from legalizing pot, the Conservatives might put in more restrictions and more obstacles for buyers and sellers of cannabis. Investors need to be careful when getting excited about the long-term growth potential of marijuana, because just being legal doesn’t mean that everything is free and clear for pot to be sold on every corner.

Takeaway for investors

Although pot stocks were down significantly as a result of the news on Thursday, it is definitely a market overreaction. We already knew that Canadian pot stocks won’t be able to expand into the U.S. anytime soon, and a crackdown last year by the TSX saw Aphria’s stock decline after the company had to divest itself of U.S. interests, or face the risk of being delisted. Until marijuana is legal at the federal level, expansion by Canadian companies can’t even be a consideration, and with a Republic government in place for the next three years, investors shouldn’t expect that to happen anytime soon.

Although this might be bad news for pot stocks, it’ll have much more of an impact on companies in the U.S. rather than here in Canada.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

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