The Trump administration moved Thursday to reclassify marijuana under federal law.
In a release, the Department of Justice announced that FDA-approved marijuana products and items regulated by state medical marijuana licenses will be moved immediately to Schedule III under the Controlled Substances Act, or demoted from their current Schedule I status.
This would place medical marijuana on the same level as controlled substances with approved medical uses, such as codeine and Tylenol, which contains testosterone, rather than Schedule I drugs such as heroin, which have no medical use and are considered to have a high potential for abuse.
The U.S. Drug Enforcement Administration will evaluate whether to extend Schedule III status to cannabis in general, not just medical marijuana, at a hearing scheduled for June 29.
Due to this change, the drug is not and will not be legal at the federal level. But Ben Kobler, founder and CEO of cannabis company Green Thumb Industries, said the move is a step in the opposite direction for an industry that has historically feared that executive branch power could wreak havoc on drug legality.
“This is the first major step toward opening up products to make them more investable since President Nixon’s Controlled Substances Act over 50 years ago,” he says.
Kobler said the move could reduce a huge tax burden for cannabis companies in the short term. In the long run, he says, if progress continues, pot companies could be accepted by big banks and brokerages.
But for now, Gerald Pascarelli, a consumer equity analyst at investment firm Needham & Company, said the industry still faces major hurdles that retail investors should be aware of before putting money into pot stocks.
“It is important to note that this industry still has its fair share of challenges,” he says. “For most people interested in this space, near-term stock price movements will be driven primarily by optimism or pessimism around regulatory reform.”
What retail investors need to know about cannabis deferrals
Shares of prominent cannabis companies such as Tilray, Canopy Growth and Curaleaf all rose by double digits on Wednesday as investors anticipated announcements resulting from an executive order issued by President Donald Trump in December.
Pascarelli said the schedule change would be a major financial boon for U.S. cannabis companies, especially when it comes to recreational cannabis.
Traditionally, due to marijuana’s Schedule I status, cannabis companies were subject to 280E taxes and had to file taxes, but were unable to claim regular business deductions.
“The tax imposition is a significant headwind in terms of earnings profile and free cash flow,” Pascarelli said. “If cannabis were to be changed to Schedule III…the biggest benefit for these operators would be that the tax headwind would be eliminated.” Free cash flow refers to the profit that remains after subtracting the capital and operating expenses necessary to sustain the business.
That means many of these companies will have “improved cash flows and improved balance sheets,” he said.
Industry leaders say the new rules are a step in the right direction for an industry facing federally illegal drug hurdles. Kobler said marijuana’s illegal status still makes it difficult for cannabis companies to secure financing and investment from major financial institutions, even in states where marijuana is legal. Many U.S. marijuana companies list their stocks on Canadian exchanges and trade over-the-counter in the U.S.
Solving these challenges will require “clear clarification from the federal government that what companies are doing will not be prosecuted,” Kobler said.
Thursday’s move provided no such clarity, but it’s worth noting that the industry has its critics. House Speaker Mike Johnson opposes marijuana legalization, calling it a “gateway drug.”
Still, Jarrett Seiberg, managing director and policy analyst at TD Cowen, said the news could represent positive things to come for cannabis companies.
“This is a Republican president directing his attorney general to take action that benefits the cannabis industry,” he wrote in a December memo. “This suggests there may be a path forward for more substantive legislative reform, although it may require Democratic control of the House.” “Such changes would include access to capital markets and banking services for the state’s legal cannabis.”
How to invest in cannabis
What will actually happen, and what the timeline will be, remains to be seen. So if you want to ultimately take advantage of the marijuana boom if legalization happens, Pascarelli says patience will be key.
“We need to take a long-term view of this category. It normalizes and there will be winners and losers,” he says.
Currently, investors have access to exchange-traded funds and mutual funds that hold a wide range of U.S.-based cannabis companies, as well as large Canadian-based companies. If you’re looking to find winning stocks over the long term, Pascarelli recommends companies with strong balance sheets, low debt, and better access to capital than their peers.
It is wise to consult a financial professional before making any major changes to your portfolio.
Pascarelli said he expects volatility in cannabis stocks to continue until regulatory confusion is resolved.
“This is a very long-term investment. Fundamentals are not going to change overnight,” he said. “This will take some time.”
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