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Why Aurora Cannabis, Canopy Growth, and Tilray Stocks Just Dropped

What happened

Marijuana investors are getting bummed out on Wednesday, as a stock market rally that roared early in the week begins to falter. As of 12:05 p.m. ET, both Canopy Growth (NASDAQ: CGC) and Aurora Cannabis (NASDAQ: ACB) are down about 5.5%, while Tilray Brands (NASDAQ: TLRY) suffers a smaller loss of 3.5%.

Partly, this sell-off is just a function of stock markets in general being down today -- but as it turns out, marijuana stocks may have a problem all their own.

So what

As you're surely aware by now, there's a movement afoot in Congress to legalize marijuana at the national level. Things haven't gone entirely smoothly -- President Joe Biden, for example, seems still opposed to the idea. But by and large, even conservative legislators in Congress proper appear to be largely on board with the idea of legalizing weed in one form or another.

But maybe not in all forms.

As Marijuana Moment reported yesterday, the 156-member House Republican Study Committee (that's about 35% of Congress) has just put out a report blaming state-level marijuana legalization for "an explosion of marijuana use among children." The RSC is recommending that, whatever happens with marijuana legalization in general, the production and sale of marijuana edibles "in the form of candy or beverages" should remain banned if there is "reasonable cause to believe" they will be sold to minors. Similarly, the industry site reports that about one-fourth of members of the U.S. Senate support passing a Protecting Kids from Candy-Flavored Drugs Act.

Now what

Now here's why that should concern marijuana investors: According to a 2018 report on financial website Grizzle, while marijuana in general is a product commanding high gross profit margins (if not high net margins), the most profitable form of retail marijuana, by far, is edibles. In 2018, gross margins on dried marijuana flower were 76%, cannabis extract 84%, and edibles 92%.

Granted, these numbers were calculated based on old data. According to data from Statista, the production cost of dried cannabis has fallen substantially to about $1.04 per gram, from $1.79 per gram in the Grizzle report. But all else remaining equal, that shouldn't affect the relative profitability of one form of retail marijuana over another, in which case, it would appear that Congress' intent is to ban the sale of the most profitable form of marijuana -- even if other forms of weed offered for sale become legal.

The logical effect of such a move would be to weaken gross profit margins for big marijuana companies like Canopy, Aurora, and Tilray. And this means that, even if marijuana in general gets legalized at the federal level, if Congress maintains a ban on edibles sales, this could prevent or delay marijuana companies becoming profitable.

Long story short -- and at the risk of mixing some metaphors -- at the very moment marijuana investors are starting to see a light at the end of the legalization tunnel, Congress may snatch defeat out of the jaws of victory, and ensure marijuana remains an unprofitable business for the foreseeable future.

No wonder marijuana investors are feeling bummed today.

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Rich Smith 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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