Cannabis stocks have come roaring back on recent news of major decriminalization progress at the federal level. The big question now for anyone who owns marijuana stocks or is considering the sector: Is there more upside left?
My take is the move has more to go because of the historic nature of this news, and all the catalysts that still lie ahead. Stocks often retrace big moves, but weakness is to be bought.
Here’s more on why the move has legs, with insights from the CEOs of three companies I like the most in the group, and two top federal drug regulation attorneys in Washington, D.C.
What just happened
Cannabis stocks rocketed last week because the U.S. Food and Drug Administration (FDA) and its parent agency Health and Human Services (HHS) recommended “rescheduling” under the Controlled Substances Act of 1971. This is the draconian Nixon-era law that categorizes cannabis as a Schedule I drug — the worst kind.
This puts marijuana in the same class as heroin and fentanyl, and above meth, which has Schedule II status. HHS and the FDA both say cannabis should be moved down to Schedule III. This is an historic cultural event, and big news for cannabis companies because it would liberate them from federal taxes. The proposed change would release them from part of the Internal Revenue Service code known as “280E” which bars cannabis companies from deducting most expenses against federal taxes.
The other key here is that the HHS Schedule III recommendation signals the administration of President Joe Biden is serious about further cannabis law reform. This will speed up progress on other bullish reforms — including changes at the state level. In short, expect more big news ahead. Here’s a roundup of catalysts we could see in the U.S. and Europe, beginning this month and continuing through 2024.
1. Rescheduling progress: HHS and the FDA made the rescheduling recommendation to the Drug Enforcement Agency (DEA), which is part of the Department of Justice (DOJ). The next move will be a DEA response, in the form of a proposed rule. We should see that by year end, says Howard Sklamberg, a federal drug law expert who is a partner at Arnold & Porter. He chaired the FDA’s Marijuana Working Group for several years.
That’s an aggressive forecast considering how this process normally works. But it is realistic, agrees Shane Pennington another federal drug law expert who is a partner at Porter Wright Morris & Arthur in Washington, D.C.
In the meantime, we could get a surprise catalyst at any moment, or a leak or release of the HHS rescheduling letter. “I can’t imagine the HHS letter is going to stay hidden,” Pennington says. “Historically, HHS has just released it. That will be hugely important. I would love to read what it says. My email is blowing up with requests about what it says.”
We already know the letter marks an historical event, since HHS rescheduling guidance tells us that for the first time ever, the FDA formally acknowledges that cannabis has medical benefits, which is required for Schedule III status.
After the DEA offers a proposed rule, it will see public comment and administrative law judge hearings. Then comes a DEA recommendation to the U.S. attorney general, and finalization by the administration.
Sklamberg, at Arnold & Porter, expects all of this to happen by the middle of 2024. That would be lightning speed for a process that can take years. But he reasons the Biden administration wants to nail down the change before the mad rush to finalize laws that typically happens at the end of the last year of an administration.
“The federal agencies do not know who will be president in 2025, so if you have something important you want done, you would try to get that done before that crazy period,” he says “It is a much more aggressive timeline than other rescheduling initiatives, but this is not a normal rescheduling.”
By this he means Biden himself has called for rescheduling. And that the DEA knew it was coming. “I suspect the DEA has gotten a head start. It is not starting from scratch.”
Not everyone is so optimistic. Pennington notes historically it takes 6.8 years for a final DOJ ruling, from the time of an HHS recommendation to the DEA, which is what just happened. Since the process is currently moving forward at a bit more than twice the normal speed, this suggests the rest will take half the average — or around 3.4 years. “You can want it to go fast all you want but that won’t necessarily make it happen,” he says.
2. Banking reform: Most banks are prohibited from serving cannabis companies because it is illegal at the federal level. This forces dispensaries to operate in cash only, which is dangerous for employees. It also raises the cost of capital.
Cannabis advocates have been trying to change this for years, via the SAFE Banking Act, which is short for Secure and Fair Enforcement Act. There may be some real progress on this issue soon. The Senate banking committee will likely vote on it this month, and there could be a floor vote in October, says Charlie Bachtell, CEO of cannabis company Cresco Labs
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The House of Representatives could then vote on it near the end of the year. “That is a realistic timeline,” Bachtell says.
3. State legalization: The key states to watch are Ohio, Florida and Pennsylvania. Ohioans will vote on recreational use legalization this fall. The key question is if the referendum gets enough votes to discourage conservative lawmakers from shooting it down. Bachtell puts that threshold at 60%. A recent USA TODAY poll found 59% percent of Ohioans support legalization, with 35% opposed.
In Florida, the state’s Supreme Court is reviewing language in a proposed 2024 referendum that would let voters opine on recreational-use legalization. Approval isn’t a given. The court has a conservative bent, and it’s aware that a cannabis referendum would bring out the liberal vote.
Kim Rivers, the CEO of Trulieve Cannabis Corp.
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which has spent tens of millions of dollars on the Florida referendum effort, thinks there is a “very strong probability” the Florida Supreme Court will rule favorably on the ballot initiative. Polls show that close to 70% of Floridians support recreational-use legalization.
A favorable decision would be huge for Trulieve. It’s the biggest medicinal marijuana vendor in Florida, where it has about 50% market share. It operates more than 185 dispensaries, and two-thirds are in Florida. Approval could make Florida the largest legal U.S. cannabis market with 22 million residents and 138 million tourists a year.
In Pennsylvania, meanwhile, bipartisan support is behind recreational use, says Matt Darin, the CEO of Curaleaf Holdings
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which has been opening medical-use dispensaries in the state ahead of the potential change. Darin expects that recreational use will be approved in Pennsylvania next year and launched in 2025.
4. Progress in Europe: Germany is in the process of decriminalizing cannabis. That could lead other European countries to do the same. “We are very bullish on Europe,” Darin says. Curaleaf has been building out its supply chain and distribution presence there. He adds: “Europe has total addressable market that is bigger than the U.S. market.” Darin expects the German market, for instance, to grow as much as tenfold over the next several years. “This is the most exciting growth opportunity in cannabis right now.” Curaleaf also has a big presence in the U.K. medical cannabis market.
5. Price stability: Cannabis is easy to grow. This is one reason why the sector has been plagued with oversupply. That’s caused 30% year over year declines in wholesale prices during much of the past year. Price compression like this is not great for any business. By now, so many suppliers have closed, price declines have been leveling off in many markets, and in some markets prices are increasing, say both Bachtell at Cresco and Darin at Curaleaf. “In the last two or three months prices have been pretty stable,” Bachtell says. “In general, we are seeing a shallower slope in the price compression line and in some markets we are seeing increases.”
This is welcome news for a sector where companies have barely been able to offset retail price declines with increased sales volume.
For exposure to these bullish catalysts, consider Cresco, Curaleaf and Truelieve, or the exchange-traded funds AdvisorShares Pure US Cannabis
MSOS
) and the leveraged version AdvisorShares MSOS 2X Daily
MSOX.
Michael Brush is a columnist for MarketWatch and editor of the Cabot Cannabis Investor and Brush Up on Stocks. He has suggested CRLBF, CURLF, TCNNF, MSOS and MSOX to subscribers. Follow him on X (formerly Twitter) @mbrushstocks.
Also read: HHS recommendation to reschedule cannabis keeps pot stocks hot, but questions remain