Pot Stocks Are Wednesday's Big Stock Market Winners. Will They Disappoint Shareholders in the End?

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Wednesday brought a lull for the stock market, as Wall Street consolidated its gains following extremely strong gains on Monday and Tuesday. As of just before noon EST, the Dow Jones Industrial Average (DJINDICES: ^DJI) was down 38 points to 30,649. The S&P 500 (SNPINDEX: ^GSPC) rose six points to 3,832, and the Nasdaq Composite (NASDAQINDEX: ^IXIC) moved higher by 28 points to 13,640.

© Provided by The Motley Fool Pot Stocks Are Wednesday’s Big Stock Market Winners. Will They Disappoint Shareholders in the End?

In general, the action in the stock market was relatively quiet. But that was definitely not the case for marijuana stocks, which posted some amazing gains. Let’s look more closely at the cannabis industry and what caused investors to be so bullish on Wednesday.

Big gains for big pot stocks

The industry’s leaders saw impressive gains in their share prices. Aurora Cannabis (NYSE: ACB) was higher by 8%, while Canopy Growth (NASDAQ: CGC) weighed in with a 6% gain. Cronos Group (NASDAQ: CRON) fared even better, rising 9%. Topping the list of top stocks were Tilray (NASDAQ: TLRY), up 16%, and Aphria (NASDAQ: APHA), climbing 15%, as the two prepare to merge.

© Getty Images Hand holding marijuana leaf, with rows of plants behind.

Excitement in the space was prompted, in part, by some merger and acquisition activity. Jazz Phamaceuticals (NASDAQ: JAZZ) announced that it would acquire cannabinoid drug specialist GW Pharmaceuticals (NASDAQ: GWPH) in a deal worth $7.2 billion. According to the terms of the deal, GW investors will receive $220 per share in cash, and that sent GW stock higher by 46%.

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Some industry followers hope that the trend toward consolidation will continue. Investors have been pleased at the prospects of the Tilray-Aphria combination, which would create the largest cannabis company by revenue. Other big players could benefit from synergies, and having fewer major players could reduce competitive pressures and improve pricing power.

Marijuana gets a little help from its friends — in Washington

Meanwhile, another source of the pot-stock push came from legislators in Congress. Senate majority leader Chuck Schumer (D-N.Y.) and other lawmakers announced earlier this week that they would spearhead efforts to jump-start cannabis reform early in 2021. The move follows through on expectations that many marijuana investors had when control of the Senate changed hands following the most recent national elections.

The priority for most pot stocks would be to decriminalize marijuana at the federal level. Even though some companies have been able to operate under accommodative state laws, the fact that federal restrictions remain makes it far harder to run cannabis businesses efficiently. Simple things like business banking are difficult or even impossible under current federal legal restrictions. Even if Congress did nothing more than just get out of the way and let states decide for themselves without federal intervention, it could open the playing field to both global cannabis companies and local players.

Some see federal legalization as a potential source of tax revenue for the government, which would help to narrow large deficits. Yet investors should expect a host of U.S. companies to step up to the plate, challenging Canadian leaders like Aurora and Canopy and creating a whole new competitive dynamic. It may well be that pot legalization will become a case of being careful what you wish for.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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