This disturbing news could cause cannabis stocks to collapse this week


One of the reasons that many marijuana stocks in the United States are currently undervalued is that they cannot reach a large pool of investors. The federal marijuana ban prevents them from trading on major exchanges like the Nasdaq or the New York Stock Exchange (NYSE). Marijuana companies in the United States are also struggling to obtain financing, as many banks avoid them for fear of repercussions from the federal government.

And despite the optimism that legalization might be around the corner, this is by no means a guarantee as the industry might still have a long way to go, especially in light of recent actions taken by the biggest Bank JPMorgan Chase (NYSE: JPM).

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Bank to restrict trade in marijuana stocks that operate in the United States

According to Reuters, JPMorgan “has told the prime broker’s clients that it will no longer let them buy certain US cannabis-related securities as of November 8.” This applies to companies with a “direct connection to marijuana-related business” that do not trade on any of the major North American exchanges, such as the Nasdaq, the NYSE, or the Toronto Stock Exchange (TSX). The main ones affected by this decision are multi-state operators such as Curaleaf Holdings (OTC: CURLF) and Trulieve Cannabis (OTC: TCNNF), which, due to the illegality of cannabis in the United States, must be traded over-the-counter and on the Canadian Stock Exchange, which has more lax rules than the TSX.

The bank will allow customers to liquidate their positions in these holdings, but they will not be allowed to make new purchases or take new short positions in them. As a result, there could be a lot of selling activity this week of these pot stocks from panicked investors. This does not mean that it is impossible to buy the shares as there are other brokerages, but it is yet another example of how investing in the US cannabis industry continues to be a challenge. .

Why did JPMorgan do this?

While nothing specific has changed in the marijuana industry to suggest these types of stocks have become riskier, the bank has told clients it has a new “framework designed to comply. US laws and regulations on money laundering by restricting certain activities “.

Banks that deal with marijuana businesses must file suspicious activity reports on a recurring basis. And while it’s not impossible for a business to open a bank account or even get a loan, it certainly isn’t easy. A large bank like JPMorgan will be particularly wary of getting involved in the industry.

Nonetheless, this is an interesting development given that there appears to be hope for marijuana reform, with Senate Majority Leader Chuck Schumer pushing for the legalization of marijuana and the President Joe Biden appearing to be in favor of decriminalizing the substance. This does not necessarily mean that the bank thinks reform is a long way to go. It could simply be the bank’s own risk management team that decided to take these extra precautionary measures to ensure they don’t run up against the federal government.

Should Cannabis Investors Be Worried?

There is no doubt that this development could be of concern as it could negatively impact the liquidity of marijuana stocks. A reduction in liquidity can lead to volatile price movements, and therefore more risk in the short term.

For long-term investors, however, this is just a bump in the road. With 36 states allowing medical marijuana and 18 of them having enacted adult pot legislation, the writing is on the wall that legalization, or at least some sort of reform, is likely to be available soon. . Less than 10% of Americans think marijuana should remain illegal.

This week (and perhaps for the foreseeable future) there could be an unfavorable price movement for Curaleaf and other MSOs, but that shouldn’t deter investors from holding these stocks. The major marijuana companies in the United States are strengthening their positions in the country (Curaleaf is in 23 states) and will be among the biggest winners once marijuana reform finally takes place. With annual sales of over $ 1 billion, Curaleaf is already a leading company in the industry. As marijuana laws soften, this could allow the company to achieve even better results. Legalization, for example, would allow the company to ship its products across state borders and benefit from economies of scale.

It will take patience, but holding marijuana stocks in the US could lead to significant returns in the long run.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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