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Marijuana ETFs Bounce Back: Can the Rally Last?

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It’s been a volatile journey for marijuana stocks over the past few days. A handful of downbeat earnings ravaged the space last week only to offer a much-needed, legislation-related boost this week. Shares of marijuana companies rose on Nov 21 after a U.S. congressional committee passed a legislation that would end the federal embargo on weed (read: Can Bill Hopes Relieve Earnings-Induced Pain in Pot ETFs?).

The bill, which was passed 24 to 10 in the House Judiciary Committee on Nov 21, sent shares of Canopy Growth CGC (up 15% on Nov 21), Aurora Cannabis ACB (up 18.2%), Aphria Inc APHA (up 9.5%), Cronos CRON (up 10.9%) and Tilray Inc TLRY (up 7.2%) soaring. The biggest marijuana ETFMG Alternative Harvest ETF MJ added more than 8% on Nov 21. The fund also advanced 0.2% after hours.

The latest bill will enact a 5% federal sales tax on marijuana products that are manufactured in or imported into the United States and obliterate past criminal records. The latest approval comes two months after the “House passed a bill to advance legislation that would allow banks to provide services to cannabis companies in states where it is legal,” per Reuters.

Some Upbeat Earnings Releases

Apart from the legislation, a few upbeat earnings have also driven the space. Innovative Industrial Properties Inc. IIPR, which is focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for medical-use cannabis facilities, breezed past Wall Street's operating expectations in the third quarter.

GW Pharmaceuticals Plc GWPH, a biopharmaceutical company focused on developing and commercializing therapeutics from its proprietary cannabinoid product platform in a broad range of disease areas, beat on both lines in the September quarter.

Will the Rally Last?

Analysts are still doubtful about the near-term prospects of the space. The sponsors of the bill warned that the Senate was unlikely to give it a thumbs up any time soon. CNBC’s Jim Cramer believes that “companies need to close, funding needs to dry up, mergers must occur. Until then, these stocks are now sell-in-the-strength detritus.”

Tilray, Cronos and Aurora Cannabis shares have all lost more than half their value from their highs earlier this year. Cannabis stocks have been among the most expensive bearish bets. The fee to borrow Aurora Cannabis’ stock was 66.55% on Nov 20, which compares with fees of 0.3% to 0.5% for “general collateral” stocks, or those of large-capitalization companies, per MarketWatch. Notably, borrowing fees for shares of Apple AAPL and Tesla (TSLA - Free Report) were 0.3%, per the source.

Still, something is better than nothing. And the latest bill marks a positive development “for sentiment toward heavily-shorted cannabis equities, which have been battered by Canadian market oversaturation, as investors shift focus toward opportunity in the U.S., the world’s largest cannabis market (one-third of global demand),” per a CFRA analyst. Still, an approval by the full House and Senate should take time and will likely see a lot of revisions in the process.

Against this backdrop, investors can keep a close tab on marijuana ETFs like AdvisorShares Pure Cannabis ETF YOLO (up 5.3% on Nov 21), Cambria Cannabis ETF TOKE (up 6.4%), MJ, Amplify Seymour Cannabis ETF CNBS (up 7.2%), Cannabis ETF THCX (up 7.8%) and Global X Cannabis ETF POTX (up 10%).

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