TD Bank Takes Unusual Step on Marijuana Stocks
Getting mainstream investors on board with marijuana stocks has been a long and, at times, difficult process. And that makes sense. After all, marijuana was for a long time not only illegal, but a primary target of the U.S. War on Drugs and a multitude of anti-drug campaigns which claimed that the green herb was a dangerous substance.
But money has a way of changing minds, and we’ve seen that take place as the industry has boomed over the past two years.
Nevertheless, a recent internal memo from Toronto-Dominion Bank (NYSE:TD) says that the bank has limited its financial advisors to recommending only three marijuana stocks, claiming that concern over federal law in the U.S. has forced them into that position.
We’ve written at length about the difficulties that federal law in the U.S. presents to the marijuana sector, so this TD marijuana issue is yet another entry in the saga.
The issue is that, while certain U.S. states have legalized marijuana for medicinal and recreational purposes, federal law still classifies marijuana as an illegal substance.
The TD e-mail reportedly states that advisors are mandated to tell their clients that federal law prohibits marijuana in the U.S. and that marijuana stocks with holdings in the U.S. could therefore be subject to legal risks. (Source: “TD moves to discourage clients from investing in pot stocks, internal e-mail shows,” The Globe and Mail, April 8, 2018.)
This has been a common concern that has spread across the marijuana industry, although the problem has yet to manifest itself beyond speculation. Federal agents have yet to enter a state where marijuana has been legalized and enforce federal law.
Such a move would be highly controversial and likely spark a large backlash against the federal government. But then again, for the current administration, that isn’t exactly out of the ordinary. Although the chances of a U.S. marijuana crackdown are slim in my view, the threat is still very real and, therefore, it makes sense why some banks would want to remain cautious.
In fact, the Toronto Stock Exchange forced companies to divest certain U.S. marijuana companies in a bid to comply with federal law. If the companies had refused to divest, they would have faced possible delisting.
Coming back to the TD marijuana advisor situation, where it gets truly interesting is in terms of what the advisors are allowed to recommend.
Canopy Growth Corp (OTCMKTS:TWMJF, TSE:WEED), Emerald Health Therapeutics Inc (OTCMKTS:EMHTF, CVE:EMH), and Emblem Corp (OTCMKTS:EMMBF, CVE:EMC) are the only three marijuana companies that TD advisors are allowed to recommend in the marijuana market, according to the e-mail.
What makes this especially interesting is that, while these three companies do not currently have any holdings in the U.S., a number of other marijuana companies are in similar positions and yet are still on the TD marijuana “banned” list.
And to add further mystery to this situation, TD is the most active broker in the Horizons Marijuana Life Sciences (TSE:HMMJ) index ETF that launched last year.
The company is obviously involved in marijuana, yet it’s being rather sheepish in its policies regarding marijuana stock recommendations by its advisors. It’s a peculiar situation that ultimately harms the marijuana sector, since millions of dollars managed by these investing advisors are effectively being cut off from the sector.
Investors are still allowed to add marijuana stocks to their portfolios, but they must do so by request and, even then, they still have to receive the song and dance from advisors about the possible federal backlash.
As you would expect, this is not good news for the marijuana industry.
Not only are marijuana stocks that don’t have holdings in the U.S. upset that they are being put on a no-go list for seemingly arbitrary reasons, millions of dollars of capital are being diverted away from the market, due to the perceived—yet unmanifested—threat of a U.S. marijuana crackdown.
Frankly, I see this as a gross overreaction on TD’s part. Not to mention, some clients may be missing out on strong opportunities in the marijuana market.
But there is one takeaway from the news that should have marijuana investors who frequent Profit Confidential smiling: Canopy Growth stock is among the companies on TD’s approved list.
If you’ve been reading my work, you’ll know that I’m often high on Canopy Growth stock and see it as being one of the better long-term plays in the market. The stock appears to be in an even stronger position than I first thought.
Chart courtesy of StockCharts.com
If the TD marijuana development tells us anything, it’s that even the most cautious investment strategies in the marijuana market are still positive on Canopy Growth. That’s good news for both new buyers and long-term holders.
The first week of April was a disaster for WEED stock, with the price plummeting 20%. A similar dip occurred in February, only to lead to gains for the remainder of the month. That doesn’t mean history will repeat itself, but it does mean that there is a precedent for these large dips to precede a strong recovery period, making short-term plays in this window optimal.
I expect Canopy to perform well in the long run, with Canadian marijuana legalization on the horizon.