Pot stocks are jumping again. Hopes are up that a major marijuana-related reform could be coming in the United States after a government agency suggested that the Drug Enforcement Agency (DEA) should reschedule cannabis. But cannabis investors have been here before, and little has been done in recent years with respect to any serious reform. Is this time different, and is U.S. marijuana legalization inevitable?
Recommendation to reschedule cannabis sent to DEA
U.S. regulations currently classify cannabis as a Schedule I substance, putting it in the same category as heroin, ecstasy, and LSD. Being in that schedule makes it next to impossible for people to even research cannabis. And according to the DEA's classification, cannabis is in a category of substances that have "no currently accepted medical use and a high potential for abuse."
Last month, the U.S. Department of Health and Human Services (HHS) recommended to the DEA that cannabis should be rescheduled after conducting an 11-month review. President Biden initially made the request for the agency to make a scheduling recommendation. The HHS' recommendation would list cannabis as a Schedule III substance, which would put it alongside anabolic steroids and testosterone, where there is "a moderate to low potential for physical and psychological dependence." It's still ultimately up to the DEA, however, to make its decision on whether to move forward with the recommendation.
Does this mean legalization is coming?
Even if the DEA moves forward with rescheduling marijuana, that isn't enough to make the substance legal. Congress would still need to pass legislation to create a legal framework for marijuana. While moving marijuana off its Schedule I classification would be a positive step forward, it won't lead to the transformational steps in the industry that would need to happen to make pot stocks much safer buys.
U.S. legalization isn't inevitable, even if the DEA moves ahead with rescheduling cannabis. Ultimately, it will depend on what happens in Congress, and, unfortunately, there's not an impressive track record there to rely on.
For years, there have been efforts to try to pass the SAFE banking bill. This would allow cannabis companies to be able to work with major banks, so they can have access to bank accounts and access banking services that companies in many other industries rely on without issue. It wouldn't even legalize marijuana; it would simply help cannabis companies access funding and enable them to hold less cash on their premises. By having to hold so much cash, they become targets for armed robberies. A law to help protect employees shouldn't be difficult to pass -- but in the marijuana industry, any reform has proven to be a huge obstacle.
I don't expect legalization to take place in the U.S. until and unless a presidential candidate wins a federal election and marijuana legalization is part of their campaign promise. That's what it took for Canada, when Justin Trudeau was elected to office and eventually legalized marijuana in 2018. Without that, I think there are simply too many hurdles in Congress for a bill to legalize marijuana to have a serious chance of becoming law.
Cannabis investors have been burned before
Pot stocks were rallying last week on news of the HHS' recommendation. But just as with past hype around cannabis-related bills and hopes of legalization, this too will likely fade over time. U.S. legalization is by no means imminent. Unless you're ready and willing to hang for the long term, at least five-plus years, you're better off avoiding the cannabis industry.
For years, Tilray Brands (TLRY 2.52%) and Canopy Growth (NASDAQ: CGC) have been pumping up their businesses on the hopes that legalization in the U.S. would open up huge growth opportunities for them. In 2021, Canopy Growth CEO David Klein predicted his company would be able to enter the U.S. pot market within a year. That didn't happen.
That same year, Tilray Brands was projecting that its revenue would top $4 billion by 2024, thanks to growth opportunities in the U.S. and in European markets. That didn't pan out, and it withdrew that forecast. Maybe if Tilray keeps acquiring companies, it will have a shot at one day hitting $1 billion, but even that's a stretch right now (its current run rate would put it at around $730 million in annual revenue).
Cannabis investors and even cannabis CEOs have been overly optimistic about what the future holds. Buying stocks based on that hype has led to huge losses for investors. Shares of Tilray Brands and Canopy Growth are down more than 80% over the past five years. These companies might one day become large cannabis operators in the U.S., but their growth is not as clear-cut or definitive as their management might have you believe.
Pot stocks could be suitable investments -- as long as you temper your expectations
Investors need to take any optimistic projections with a grain of salt and remember that U.S. legalization could take years to happen, if it even happens at all. But it's by no means a guarantee.
And before you decide to invest in cannabis stocks, you should consider whether you want to hold on to an investment in that industry even if legalization doesn't happen. If you're not prepared to do so, or your entire investing thesis is based on U.S. marijuana legalization, then you're better off not investing.