President Biden's decision to initiate a cannabis scheduling review -- which will be conducted jointly by the Drug Enforcement Agency (DEA) and the Food and Drug Administration (FDA) -- lit a fire underneath pot stocks in early October. Once investors had a chance to digest this groundbreaking news, however, most pot equities quickly reversed course.

In fact, most marijuana stocks have lost significant ground since this review was announced roughly three weeks ago. Canada's Aurora Cannabis (ACB -6.05%), for instance, has shed nearly 6% of its value since the administration initiated this review.

This broad revision to the mean appears to reflect the complicated nature of this forthcoming review. After all, multiple, wholly distinct outcomes are possible from this scheduling review -- some of which are not particularly favorable for the current cohort of cannabis equities

Flowering marijuana plant.

Image source: Getty Images.

Three possible outcomes

Based on what we know today, this review should result in one of three distinct outcomes: 

  1. A review does not lead to a change in cannabis' Schedule I status under the Controlled Substances Act (CSA). This outcome would be an affirmation of the view that marijuana has no value medically and a high potential for abuse. The good news is that the limited peer-reviewed literature on cannabis does not strongly support this stance. After all, marijuana has been shown to have potential clinical benefits across several indications, such as certain types of epilepsy, various inflammatory conditions, pain management, etc. 
  2. A review results in cannabis being moved to a less strict category, such as Schedule II (same category as cocaine) or perhaps Schedule V (where cough medicines containing codeine reside). This scenario would make it far easier to conduct clinical research of cannabis' medical benefits/risks in the United States. A lower-tier scheduling might also help pave the way for key banking reforms that would make it easier for cannabis-oriented businesses to obtain traditional forms of financing, such as loans, lines of credit, etc. 
  3. Cannabis is removed from the CSA. This blue-sky scenario would decriminalize marijuana at the federal level and leave the issue of regulation up to the states. However, the dearth of rigorous clinical data on cannabis' clinical profile may prevent federal authorities from going this route. 

What this means for cannabis investors

Among these three scenarios, the federal government probably will choose the compromise option: moving marijuana to a less restrictive schedule. This avenue stands out as the most likely outcome because the DEA has repeatedly rejected several petitions to reschedule marijuana in the past, implying that there is still a fair amount of resistance within the federal government toward removing cannabis from the CSA altogether.

Moreover, to remove marijuana from the CSA, the DEA and FDA will probably require extensive research into marijuana's abuse potential and purported clinical benefits. This all-important research could take upwards of a decade to complete. Cannabis investors, in turn, should brace themselves for this less-than-optimal possibility.

Putting this convoluted legal situation into investing terms, cannabis stocks -- especially those rooted in Canada -- could continue to struggle for the remainder of the decade. That's not an ideal situation for shareholders of struggling companies like Aurora Cannabis, to be sure. But the market's dour reaction to President Biden's scheduling review seems to underscore this distinct possibility.

On the bright side, this extended battle to legalize marijuana at the federal level may end up conferring a key competitive advantage to entrenched multi-state operators (MSOs). So, if you're on the hunt for a cannabis stock, you might want to stick to MSOs with profitable operations and perhaps avoid the majority of Canadian cannabis companies such as Aurora Cannabis for the time being.