Cannabis stocks in the U.S. were closed Monday for the Martin Luther King holiday, but if other exchange trading is any indication, the two-year bear market may finally end.
On Friday after the markets closed, the U.S. Department of Health and Human Services released an unredacted document that recommended the Drug Enforcement Administration change the classification of cannabis under the Controlled Substances Act to schedule III.
The colossal 250-page document included pages of scientific studies outlining the reasons why marijuana should not be a schedule I substance and seemingly dares the DEA to come to any other conclusion.
The original letter to the DEA, sent in August 2023, redacted most of the document. Texas lawyer Matthew Zorn sued the HHS asking for the full release, resulting in this newly available document.
“It is a surreal feeling to finally read an official document from the U.S. government that confirms what humanity has known for centuries, namely that cannabis has medicinal benefits and should be treated as such,” said Brady Cobb, a lobbyist in Washington D.C. and the CEO of Sunburn Cannabis. “The move to schedule III, if adopted by the DEA, will have sweeping impacts on U.S. cannabis policy and the U.S. cannabis marketplace.
“From tax reform to criminal justice to accessibility to interstate commerce, this move would mark the true start of our legalization moment, and I am proud to be a part of it along with so many others,” Cobb continued.
Industry Catalyst
Cannabis is poised to quickly reap the benefits of the rescheduling, if it happens.
For one, removing the burden of tax provision 280E would provide a broad boost, according to a report from cannabis equity analyst Pablo Zuanic of Zuanic & Associates. These benefits include:
Significant improvement to the “cash flow picture and creditworthiness of U.S. plant-touching companies.”
New debt and equity capital flows, such as “allowing debt to be swapped for equity,” and a lower overall cost of capital.
The ability for companies to “expand and tap into new growth and investment opportunities.”
Expand opportunities for ancillary industries, such as finance, technology, and agriculture supplies.
Cannabis stock valuations have plummeted as much as 90% over the past two years as prices fell for the base product while production costs remained high. Burned investors tired of the long wait to recoup their investments.
“Each of these breadcrumbs that are left along the way to rescheduling demonstrates a massive move in our cannabis markets,” said Emily Paxhia, managing partner of Poseidon Investment Management. “These stocks are clearly spring-loaded and are ready to respond in volume and price. When one sees the moves on days where signals pointing toward scheduling, and today specifically Schedule III, one can only imagine the torque we will see on the actual announcement from the DEA.”
Cannabis stocks trading on the Frankfurt Stock Exchange, such as Cresco Labs (FRA: 6CQ) (OTC: CRLBF), jumped as much as 15%. Green Thumb Industries (FRA: R9U2) (OTC: GTBIF) saw its German stock rise more than 11%.
Early trading on the Canadian exchanges saw stocks rising, as well. Trulieve Cannabis Corp.’s (CSE: TRUL) (OTC: TNNCF) Canadian shares traded up 5% in the opening hours, while Green Thumb (CSE: GTII) was up almost 4% at the open.
What’s Next?
Zuanic anticipates a DEA “announcement or leak” by mid- to late summer. A public comment period likely would follow, “as per protocol,” with actual details of the framework not coming until after the election.
He even surmised that President Joe Biden could use the report as a campaign booster to ask voters to let him finish what he has started with cannabis. While White House support has been lackluster so far, the scientific documentation could give provide the President’s team a level of comfort for taking a stand.
“This is a very positive step towards the end of prohibition and for public health, and signals that the Biden administration is poised to complete its expeditious review to reclassify cannabis,” Shawn Hauser, partner at Vicente LLP, said.
Unknowns Remain
The industry has traded on hope for years, but after repeated knock downs, analysts had started to temper calls on rescheduling. Many feared the DEA might slow walk a decision.
Zuanic noted, however, that stocks could pop early in the week, but some traders might opt to take profits on the move which would send the stocks lower. The volatile trading pattern isn’t for the risk-averse.
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