In the 11 months since President Donald Trump was inaugurated for his non-consecutive second term, change has been commonplace. Since taking office, Trump has overseen the passage of his flagship tax and spending law, the "big, beautiful bill," introduced his sweeping global tariff and trade policy, and made an assortment of adjustments to Social Security, including the signing of an executive order (EO) that ended the use of paper checks to dole out benefits.
Last week, the president oversaw the next of what's been a series of historic changes in Washington, D.C. On Thursday, Dec. 18, he signed an EO ("Increasing Medical Marijuana and Cannabidiol Research") designed to fast-track the ongoing review by the U.S. Food and Drug Administration (FDA) to reclassify marijuana from a Schedule I substance to Schedule III under the Controlled Substances Act (CSA).
President Trump signing paperwork in the Oval Office. Image source: Official White House Photo by Shealah Craighead, courtesy of the National Archives.
The president's EO follows a 2023 recommendation from the Department of Health and Human Services that cannabis be adjusted to a Schedule III substance under the CSA. This reclassification would open new channels for medical marijuana research, as well as benefit publicly traded pot stocks (I'll detail these benefits later).
But when Trump signed this groundbreaking EO, cannabis stocks plummeted. Trulieve Cannabis (TCNNF 1.71%) lost 24% of its value on Dec. 18, with Curaleaf (CURLF 1.38%), Cresco Labs (CRLBF 1.42%), and Green Thumb Industries (GTBIF 0.83%) shedding 32%, 39%, and 17%, respectively. Canadian licensed producers followed suit, albeit to a lesser degree, with Canopy Growth (CGC 2.34%) losing 12%.
It's not the reaction you'd expect for such a long-awaited moment for the cannabis industry -- yet there's a good reason why this sell-off occurred.
Pot stocks are plunging on the fast-tracked reclassification of cannabis -- and for good reason
On the surface, Trump's EO appears to be a win for the cannabis industry. For 55 years, marijuana has been listed next to heroin and LSD, among other drugs, as having no medical benefits under the CSA. This EO establishes the legitimacy of cannabis as having medical benefits and paves a path forward for patients to potentially gain easier access to cannabidiol (CBD)-based therapies.
However, this major leap forward for medical cannabis comes with an equally devastating setback for those hoping to see recreational marijuana become legal at the federal level. According to President Trump:
It [the EO] does not legalize marijuana in any way, shape, or form or in no way sanctions its use as a recreational drug... It's never safe to use powerful controlled substances in a recreational manner. So, unless a drug is recommended by a doctor for medical reasons, just don't do it.
In other words, while the president was offering a lifeline to companies engaged in the production and sale of medical marijuana, he pulled the rug out from under those banking on an eventual easing of restrictions for recreational cannabis use.
Although the operating margins associated with medical marijuana are notably higher than those tied to recreational weed, the addressable revenue opportunity for adult-use marijuana dwarfs the medical market.
An April 2023 analysis from the MJBiz Factbook estimated U.S. cannabis retail sales would reach $56.9 billion (on the high end) in 2028. Just $14.1 billion of this figure was projected to come from medical marijuana, with the remaining $42.8 billion expected to derive from recreational use.
While 24 states (plus Washington, D.C.) have legalized the recreational use of cannabis, the dynamics of how much marijuana a person can have for personal use, or how many flowering plants can be grown at a residence, can vary by state.
President Trump made clear that for as long as he's president (until Jan. 20, 2029), adult-use marijuana has no chance of being federally legalized. This is likely to stunt the growth potential of Trulieve Cannabis, Curaleaf, Cresco Labs, and Green Thumb Industries, as well as hinder any attempt by Canadian licensed producers, such as Canopy Growth, to broadly enter the U.S. cannabis market.
Image source: Getty Images.
There is a silver lining to Trump's marijuana rescheduling EO
Although President Trump put the kibosh on any federal legalization momentum that may have been building up since his inauguration, his fast-track reclassification order is capable of providing a silver lining for U.S. marijuana stocks.
To begin with, reclassifying cannabis from Schedule I to Schedule III opens the door to basic financial services, which have mostly been lacking due to legal concerns.
Even though dozens of individual states have given medical and/or adult-use weed the green light, the fact that it remained a Schedule I drug under the CSA at the federal level caused most banks and credit unions to avoid offering loans and lines of credit to marijuana-based businesses. If the FDA does reclassify cannabis as a Schedule III substance, financial institutions will be free to engage with pot stocks without having to worry about legal implications.
With access to basic financial services, existing borrowing costs may decline for cannabis companies. Further, there may be a reduced need for dilutive share offerings, which would be positive for existing shareholders.
OTC: TCNNF
Key Data Points
Arguably even more important is the fact that rescheduling would no longer subject Trulieve Cannabis, Curaleaf, Cresco Labs, and Green Thumb Industries to U.S. tax code Section 280E.
Code 280E was implemented as part of the Tax Equity and Fiscal Responsibility Act of 1982 to disallow businesses that traffic in illegal substances from taking normal corporate deductions. Any business whose primary operations involve the sale of Schedule I or II substances under the CSA can deduct the cost of goods sold and effectively nothing else. This has led to an exceptionally high effective tax rate for pot stocks.
With the assumption that the FDA will reschedule marijuana to Schedule III under the CSA, Trulieve, Curaleaf, Cresco Labs, and Green Thumb will no longer be subjected to 280E. Everyday expenses, such as rent and payroll, can be deducted, which should have a positive impact on their operating results in the quarters to come.
But whether this silver lining is enough to offset the reality that recreational cannabis is a no-go at the federal level for at least three more years is still to be decided.
