The U.S. Drug Enforcement Administration’s recent announcement to reschedule marijuana as a less dangerous drug represents a pivotal moment for the state-legal cannabis industry. This potential reclassification could signal a major breakthrough, offering hope for increased profitability and competitiveness among licensed cannabis businesses. However, despite the optimism, many industry insiders remain cautious, noting that full legalization remains a significant and unresolved challenge.
Potential Benefits of Rescheduling
Erik Knutson, chairman of the American Trade Association for Cannabis and Hemp, is among those who see potential benefits in rescheduling. He argues that this move could provide essential economic relief to licensed cannabis businesses by allowing them to access tax deductions and credits typically reserved for federally legal enterprises. These changes could significantly enhance the financial stability of cannabis companies, particularly those struggling with high operational costs.
Despite this promising development, Knutson also warns that rescheduling alone will not address all the industry’s challenges. Without full legalization, the black market will likely continue to thrive in states where legal access to cannabis is still restricted. This ongoing competition from the illegal market, coupled with the complexities of the current regulatory environment, underscores the need for comprehensive reform.
Industry Challenges and Investor Caution
The cannabis industry has long faced a range of obstacles, including oversupply, limited access to mainstream institutional investors, and intense competition from the illegal market, where marijuana is often sold at lower prices. These issues have created a volatile environment for cannabis stocks and investments. For instance, the AdvisorShares Pure US Cannabis ETF (MSOS), a leading fund in the sector, saw a 20% surge in response to the rescheduling news. However, this spike was short-lived, and the fund quickly lost much of its gains. This volatility reflects broader uncertainties in the cannabis market, which has experienced a rollercoaster ride since its peak in 2021 when federal legalization was widely anticipated under the Democratic administration.
Investors are advised to approach the cannabis sector with caution. Alan Brochstein, CEO of New Cannabis Ventures, recommends a strategic approach, suggesting that investors closely monitor developments and consider buying on market dips rather than making large, speculative investments. This advice is particularly relevant given the history of unmet expectations and disappointments in the industry due to stalled federal action.
For those considering investing in cannabis stocks, several notable options are worth watching. These include Ascend Wellness Holdings Inc. (AAWH), Cannabist Company Holdings Inc. (CBSTF), Green Thumb Industries Inc. (GTBIF), Trulieve Cannabis Corp. (TCNNF), Cresco Labs Inc. (CRLBF), Verano Holdings Corp. (VRNOF), and TerrAscend Corp. (TSNDF). Each company offers unique opportunities and challenges, and it is crucial for investors to evaluate their financial health and growth potential carefully before making investment decisions.
Brochstein also points out that companies with weaker balance sheets, such as Ascend Wellness and Columbia Care (now Cannabist), could benefit significantly from rescheduling. The removal of the federal tax burden would provide much-needed relief to these businesses. Additionally, vertically integrated cannabis operators—those that handle cultivation, processing, and manufacturing in-house—might be particularly well-positioned to take advantage of the evolving regulatory landscape.
Brian Vicente, a founding partner at the cannabis law firm Vicente LLP, emphasizes the potential impact of rescheduling on retail-heavy cannabis stocks. For the first time, these companies could qualify for traditional business deductions, such as those for payroll and rental costs. This eligibility could greatly enhance their profitability and stock value, marking a significant shift in the financial dynamics of the cannabis sector.
As the cannabis industry navigates this period of potential transformation, it is essential for investors to remain alert and flexible. While rescheduling might offer a substantial boost to the sector, it will not resolve all the issues faced by state-legal cannabis businesses. Achieving full legalization remains a critical goal for many within the industry, as it would create a more level playing field with the illicit market and provide a more stable and predictable business environment.
