It's happening again. The cycle of pot stocks surging on news related to potential cannabis reform. It's been a while since the industry has seen so much bullishness, as the vast majority of investors have shunned cannabis in favor of more promising growth investments.
Last week, however, pot stocks across the board were rallying. And the big reason was the renewed hope that significant changes could be coming for the cannabis industry. U.S. President Donald Trump is looking at rescheduling cannabis as a less dangerous drug. Nothing is a sure thing yet, but it's a positive development nonetheless. Here's what you need to know.
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Rescheduling is not the same as legalization or decriminalization
Currently, marijuana is classified as a Schedule I substance, putting it in the same category as heroin, LSD, and other harmful substances. Schedule I drugs have "no currently accepted medical use and a high potential for abuse." Given that dozens of states have legalized cannabis for medical use and some countries around the world also permit it for those reasons, its current classification certainly raises more than a few eyebrows.
Trump is reportedly looking at rescheduling cannabis to a lower level, possibly Schedule III, which includes testosterone, ketamine, and anabolic steroids. This is not a new development, as there were hopes that reclassification would have taken place under former President Joe Biden. It was back in October 2022 when Biden first asked for the Department of Health and Human Services to review marijuana scheduling. But as with anything related to cannabis, any changes can take a while.
The important thing to remember is that while rescheduling cannabis might make it easier to research marijuana, it does not mean that legalizing marijuana is imminent or that even decriminalization is sure to follow. The problem is that, based on how hot pot stocks have been moving recently, investors are acting as if more significant reform is inevitable.
Not every cannabis company will directly benefit from rescheduling
The biggest near-term win from cannabis rescheduling could be a lower tax bill for marijuana companies. If marijuana were to become classified as a Schedule III drug, then section 280E would no longer apply. This section of the tax code prevents cannabis businesses from deducting ordinary business expenses from their tax returns.
Last year, multi-state marijuana operator Curaleaf Holdings (CURLF -13.79%) estimated that it would save about $150 million annually due to rescheduling, as a result of the "onerous 280E tax provision" no longer applying. Curaleaf is an example of the type of stock that would benefit from the rescheduling of cannabis. While it wouldn't necessarily open up huge new markets for the business, it would help it achieve some tax savings.
Despite being one of the largest cannabis operators in the country, Curaleaf still struggles with both growth and profitability. During the first six months of the year, its revenue was $625 million, down 8% from the same period last year. And its net loss during the past two quarters was $114 million, with Curaleaf's provision for income tax being one of its largest expenses -- $68 million.
Shares of Curaleaf rallied last week on recent developments and climbed to more than $3, the highest levels they've reached since last year.
But other cannabis stocks also surged, including Canadian-based Tilray Brands (TLRY -7.46%). Tilray benefits from being one of the most recognizable cannabis companies in the world as it trades on the Nasdaq exchange. Curaleaf and other multi-state operators aren't able to do so since marijuana isn't federally legal in the U.S. (whereas Canada has legalized the substance). As a result, anytime there is positive pot-related news, Tilray benefits from it, even when it arguably shouldn't. On Aug. 8, Tilray's stock closed at just $0.65, and as of the end of last week, it was at $1.03, soaring by more than 58% in a span of just five trading days -- and that's with it giving back some gains later in the week.
Rescheduling cannabis won't enable Tilray to transport products into the U.S. While excitement may be rising around legalization, that is by no means a sure thing.
Cannabis stocks are still risky investments
Investing in cannabis stocks comes with big risks. The majority of the businesses aren't profitable, and reform in the industry can take a long time. Unless you have both a high risk tolerance and a lot of patience, you may be better off avoiding cannabis stocks entirely. And while there can be significant upside for them in the long run, it's important to remember that not all cannabis companies will benefit from rescheduling, and it's still not a guarantee to happen.
