Cannabis stocks were surging last week on the news that the Drug Enforcement Administration (DEA) is going to reclassify marijuana. It will no longer be a Schedule I drug alongside heroin and LSD. Instead, it will be moved to Schedule III, where ketamine and certain anabolic steroids are grouped.
Usually, when there's some positive news around marijuana reform, shares of Tilray Brands (TLRY -2.62%) and Canopy Growth (CGC -6.92%) skyrocket. But before you consider buying shares of these pot stocks, there are three things you need to know.
1. Legalization isn't imminent
Rescheduling marijuana isn't the same as legalization. It doesn't even mean that legalization is imminent. While it may seem that way, any change in government policy can take a long time. President Joe Biden asked the Department of Health and Human Services (DHHS) to review marijuana's classification back in October 2022. While the review did help lead to the current situation and the rescheduling of marijuana, it took a year and a half to get to this point.
Consider even more complex issues than rescheduling, such as taxes, advertising, licensing, and a myriad of other items that would need to be worked out before legalization takes place. But even before that, Congress would need to move ahead with a bill to legalize marijuana. And again, there's no reason to expect that's on the horizon, either.
And legalization is what it would take for Tilray Brands and Canopy Growth to be able to enter the U.S. pot market.
2. Multistate operators, not Canadian-based pot stocks, may benefit the most from these developments
The excitement around Tilray Brands and Canopy Growth is often centered on the assumption that the U.S. pot market will open up and these Canadian-based cannabis companies will generate massive revenue and earnings growth. But if full-on legalization isn't inevitable, then these stocks won't see any direct benefit from these recent developments.
The biggest winners are likely to be multistate operators (MSOs), which are based in the U.S. already. Stocks such as Curaleaf Holdings and Trulieve Cannabis are examples of businesses that may benefit the most. Rescheduling marijuana will make it easier to research cannabis, and it could make it easier for the big banks to do business with cannabis companies, which has long been a problem for MSOs, hence the push for a cannabis banking bill over the years (which has never passed into law). The biggest financial benefit would come in the way of tax savings, as section 280E, which is particularly burdensome for MSOs, would no longer apply. A lower tax bill would help improve profitability for many MSOs.
3. It doesn't make Tilray Brands and Canopy Growth any less risky
At the end of the day, rescheduling cannabis won't have any positive impact on Tilray Brands or Canopy Growth outside of potentially getting their stock prices higher due to greater interest in pot stocks. But smart investors know that these remain highly risky investments, and rescheduling marijuana won't change that or help their operations.
For years, these companies have struggled with profitability, and that isn't likely to change once marijuana is rescheduled in the U.S.
CGC Net Income (Quarterly) data by YCharts.
The spikes in their share prices due to news about marijuana reform are often short-lived because, in the end, these businesses aren't in any better positions than they were before, nor are they any better investments.
Investors are better off steering clear of Tilray Brands and Canopy Growth
Tilray Brands and Canopy Growth often get the bulk of the attention when the cannabis industry is in the news, regardless of whether a development will help them or not. The danger in rushing out to buy these stocks on any favorable marijuana news is that could set you up for a significant loss as these stocks can sometimes trade like highly volatile meme stocks. The safer option is to avoid these cannabis stocks altogether and instead go for a large, established MSO.
