This has been a game-changing week for U.S. politics . On Tuesday night, Nov. 6, Americans across the country went to the polls to determine the make-up of the 116th Congress. When the dust settled, Democrats had picked up more than enough seats in the House of Representatives to claim a majority for the first time in eight years. Meanwhile, Republicans not only held on to what had been a slim majority in the Senate -- they expanded their number of seats. In other words, we're looking at a split Congress for the first time in four years.
However, not all of the big news stories ended with election night. On Wednesday, Nov. 7, less than a day after the midterm elections ended, Attorney General Jeff Sessions announced that he was resigning, pursuant to a request from President Trump.
Former U.S. Attorney General Jeff Sessions (center), his wife, and President Trump signing documents. Image source: Official White House Photo by Benjamin D. Applebaum.
Sessions' departure creates a buzz with pot stocks
Sessions' resignation shouldn't come as anything of a shock, given how much Trump and Sessions butted heads on key issues, including the ongoing investigation into Russia's involvement in the 2016 presidential election. But his stepping aside has been viewed by many as a necessary step to push the marijuana legalization movement forward in the United States.
That's because Sessions has been perhaps the most ardent opponent of cannabis on Capitol Hill. This is a lawmaker who said "Good people don't smoke marijuana." He also sent a letter to a handful of his congressional allies in 2017 in the hope of repealing the Rohrabacher-Farr Amendment , which protects medical marijuana businesses from federal prosecution. In effect, Sessions made it very clear that federal cannabis wouldn't be legalized under his watch.
When news hit the wires that Sessions was stepping aside, pot stocks notably surged. Tilray (NASDAQ: TLRY) was perhaps the biggest winner, with its shares surging 31% and pushing the company back above a $13 billon market cap. Tilray has already been given the OK from the U.S. Drug Enforcement Agency (DEA) to import an investigational drug containing the cannabinoids tetrahydrocannabinol (THC) and cannabidiol (CBD) for a study on essential tremor at the University of California, San Diego. The company's focus on medical patients -- there are now 32 medically legal states following the midterm elections -- and its push into international markets have investors hopeful that a change in tune is on tap for the U.S. federal government.
Other solid winners following news of Sessions' departure included Aurora Cannabis (NYSE: ACB) , Cronos Group , and Canopy Growth Corp. (NYSE: CGC) , which rose by 9%, 8%, and 8%, respectively.
Image source: Getty Images.
Resistance to legalization goes well beyond Jeff Sessions
The reality, however, is that Sessions' resignation is unlikely to affect the outlook for legalization in the United States . Despite being the figurehead for the anti-legalization movement, and perhaps even encouraging cannabis enthusiasts to take action, there's much more to legalization resistance than just one person.
First, there are the other 535 lawmakers in Washington -- 100 in the Senate and 435 in the House. Even though the newest Gallup poll finds that an all-time record 66% of Americans want to legalize marijuana, lawmakers from both sides of the aisle have had little interest in bringing cannabis legalization to the docket in Congress. Frankly, there are far more pressing issues, such as healthcare and the debt ceiling, for them to consider putting cannabis legalization on the table.
Second, even if lawmakers were to consider legalization, they wouldn't introduce a bill for vote until clinical studies clearly found that the benefits of cannabis use outweigh its risks. Lawmakers and the president have called for increased medical and clinical research for years, but the red tape surrounding the drug's Schedule I classification has made this research almost impossible to run. This Catch-22 has held cannabis back at the federal level for some time and will probably continue to do so.
Third, and arguably most important, legalization would be a net negative for the federal government . Currently, marijuana-based businesses in legalized states are subject to Section 280E of the U.S. tax code. Introduced in the early 1980s, this tax code disallows businesses that sell a federally illicit substance from taking normal corporate income tax deductions, save for cost of goods sold. This can lead to effective income tax rates of as much as 70% to 90%. If marijuana were to be legalized, weed businesses would no longer be subject to 280E, thereby reducing tax revenue collection by billions of dollars over the next decade. With the federal budget deficit hitting a six-year high in 2018, further reducing revenue wouldn't sit well with Congress.
An argument could even be made that Sessions' departure will lessen the fire that cannabis enthusiasts have to legalize marijuana. Without a genuine figurehead for the anti-legalization movement in Washington, the push to green-light pot could go up in smoke .
Image source: Getty Images.
Gains in pot stocks make little sense
Given all the variables working against legalization, the gains that marijuana stocks saw on Wednesday would appear to make little sense. Although wide share-price vacillations are commonplace in the industry, nothing has fundamentally changed with any of the big cannabis companies following Sessions' resignation.
Sure, Tilray gained nearly $33 a share on Wednesday, but Sessions' departure doesn't provide any guarantees that it'll see a dime in extra revenue or profit anytime soon. In fact, it would probably take a miracle for Tilray to hold its $13 billion market cap, considering how many obstacles it's yet to face. In just a little over two months, Tilray will face the end of its lock-up period, which will free insiders to bail on some or all of their initial positions.
Tilray is also in the midst of expanding its production capacity to compete with its peers. With around 850,000 square feet of capacity on track to be completed by the end of this calendar year, Tilray is miles behind Canopy Growth and Aurora Cannabis. When at peak production capacity, Canopy and Aurora Cannabis should hit approximately 500,000 kilograms and more than 600,000 kilograms per year. I'd peg Tilray at just 75,000 to 85,000 kilograms at the moment, with room to perhaps triple its yield over the next three years. Still, building out its growing capacity and pushing into international markets is going to be pricey, more or less locking Tilray into losses for the next couple of years.
Even Canopy Growth and Aurora Cannabis, which are much further along in their production capacity expansion and licensing than Tilray, are no locks to turn a recurring profit anytime soon, without the assistance of fair-value adjustments to their biological assets. The capacity expansion, marketing, and brand-building phase the marijuana industry is currently undergoing is very costly, and it'll probably mean losses in the intermediate term .
In other words, Sessions' resignation is really much ado about nothing for marijuana stocks and the legalization movement.
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Sean Williams 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 .