Trump administration moves to reclassify marijuana—what it means for investors
The Trump administration moved to reclassify marijuana under federal law on Thursday.
In one versionThe Justice Department said it will immediately move FDA-approved marijuana products, along with items regulated by state medical marijuana licensing, to Schedule III under the Controlled Substances Act, a reduction from their current Schedule I status.
This puts medical marijuana alongside regulated drugs with recognized medical uses, such as codeine and Tylenol with testosterone, rather than Schedule I drugs such as heroin, which are considered to have no medical use and high abuse potential.
The U.S. Drug Enforcement Administration will consider whether to expand Schedule III status to include marijuana in general, not just medical marijuana, at a hearing scheduled for June 29.
The amendments have not and will not legalize the drug at the federal level. But Ben Kovler, founder and CEO of cannabis company Green Thumb Industries, says the moves are a step in the opposite direction for an industry that has historically feared executive authority could deal a major blow to the drug’s legality.
“Since Nixon’s Controlled Substances Act was enacted more than 50 years ago, this is the first major step toward bringing the product to market, which will make it much more investable,” he says.
Kovler says this move could eliminate the huge tax burden on cannabis companies in the near term. He says continued progress over the long term could see pot firms being adopted by major banks and brokerage firms.
For now, the industry still faces major hurdles that retail investors need to be aware of before putting money into stocks, says Gerald Pascarelli, a consumer equity analyst at investment firm Needham & Company.
“It’s important to note that this sector still has some challenges,” he says. “For most people interested in this space, stock price movements in the near term will be largely determined by optimism or pessimism around regulatory reform.”
What retail investors need to know about cannabis rescheduling
Shares of leading cannabis companies like Tilray, Canopy Growth and Curaleaf double digit gains As investors await the announcement on Wednesday, executive order It was released by President Donald Trump in December.
Pascarelli says that’s because rescheduling (especially if it’s for recreational purposes) would be a huge boon to the finances of U.S. cannabis companies.
Traditionally, due to marijuana’s Schedule I status, weed companies were subject to 280E tax, meaning they had to file taxes but couldn’t claim regular business deductions.
“The tax penalty has had a huge negative impact on earnings profiles and free cash flows,” says Pascarelli. “If cannabis is rescheduled to Schedule III … the biggest benefit for these operators is that it eliminates tax volatility.” Free cash flow refers to the profit remaining after capital and operational expenses required to run a business.
In short, he says most of these companies will see “better cash flow and a better balance sheet.”
Industry leaders say the new rules are a step in the right direction for an industry that has faced hurdles from the drug’s federal illegality. Marijuana’s illegal status still makes it difficult for pot companies to secure financing and investment from major financial institutions — even in states where the drug is legal, Kovler says. Many US cannabis companies list their stocks on Canadian exchanges and trade over-the-counter in the US
Addressing these challenges will require “the federal government to make clear that what companies do will not be sued,” Kovler says.
Thursday’s move did not provide that clarity, and it’s worth noting that the industry has its detractors. House Speaker Mike Johnson opposes marijuana legalization and called it a “gateway drug.”
Still, the news could be a symbol of positive things to come for marijuana companies, says Jaret Seiberg, managing director and policy analyst at TD Cowen.
“This is a Republican president ordering his Attorney General to take steps that will benefit the marijuana industry. While this may require the House to go to Democrats, it suggests there may be a path forward for more fundamental legislative changes,” he wrote in a December memo. he wrote. “Such changes would include access to capital markets and banking services for the state’s legal marijuana.”
How to invest in marijuana
We’ll see what actually happens and on what timeline. Pascarelli says this means patience will be crucial if you hope to eventually capitalize on a marijuana boom if legalization occurs.
“You need to take a long-term view that the category will normalize and there will be winners and losers,” he says.
For now, investors have access to exchange-traded funds and mutual funds that hold a wide variety of U.S.-based cannabis companies, as well as some major players based in Canada. If you’re hoping to find stocks that can be profitable over the long term, Pascarelli recommends companies with strong balance sheets, low debt, and better access to capital than similar firms.
It would be wise to consult a financial professional before making any major changes to your portfolio.
Meanwhile, volatility among pot stocks is expected to continue as regulatory issues are resolved, Pascarelli says.
“This is a very long-term investment. This is not an overnight change in fundamentals,” he says. “This will take some time.”
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