CURLF

High Hopes: Could 4/20 Light Up a Cannabis Stock Rally?

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With April 20 approaching (a notable cannabis celebration indeed), thoughts may turn to investing in marijuana stocks. However, beyond the symbolic date, imminent catalysts could drive significant growth in this sector for speculators and those wishing well on the providers of sticky icky turning higher.

This election year, as President Joe Biden addresses discontent among young voters, advocating for student debt forgiveness and cannabis law liberalization, bipartisan support for cannabis reform emerges. This political landscape suggests potential advancements in cannabis legislation shortly.

The State of Cannabis Stocks

As the first quarter concluded, various industries captured attention, but one notably dormant sector sparked excitement among investors. With the rise of discussion about cannabis use and legalization, various cannabis stocks are now being discussed by certain online investor groups as potential double-ups in short order.

I think there’s certainly some reason to be optimistic. But it’s also important to remember that the Biden Administration has not been kind to cannabis companies thus far in his tenure.

That’s not to say some haven’t been trying. Vice President Kamala Harris advocated for marijuana legalization and urged the DEA to reclassify this drug during a mid-March White House meeting. That marked the first time Harris expressed support for federal legalization since joining the Biden ticket.

Harris criticized the Schedule I classification of marijuana as “absurd” during a White House meeting, advocating for its prompt rescheduling. The overall market rally provided additional momentum for cannabis stocks.

Various cannabis ETFs have dipped recently, but still maintain some strong momentum this year, as investors continue to bank on catalysts that may or may not materialize.

Last summer, the U.S. Department of Health and Human Services proposed moving cannabis to Schedule III, potentially permitting medical use federally. The Drug Enforcement Administration reviewed this recommendation without specifying a decision timeline, sparking speculation of an imminent ruling.

Cannabis firms anticipate this reclassification to eradicate the 280E tax law, enabling standard business tax deductions. Curaleaf (OTCMKTS:CURLF) projects annual savings of $150 million upon removing 280E restrictions.

Lastly, there’s the legalization of marijuana in Germany, effective April 1. The law now allows Germans to possess, grow and distribute cannabis in social groups.

Cannabis Rescheduling

During the Nixon era, cannabis fell into the most severe category of drugs under the Controlled Substances Act, alongside heroin. The Department of Health and Human Services under Biden urged the DEA to reclassify cannabis to Schedule III. The move would boost cannabis stocks by unlocking revenue streams and allowing deductions against operating expenses.

The process involves a DEA-proposed rule change, expected to appear in the federal register soon, although it could take up to six months for the DEA to review the HHS request.

The timing and specifics of the DEA’s recommendation regarding marijuana rescheduling remain uncertain. Various resources explore potential DEA actions, timelines and legal implications. This period marks a pivotal moment in U.S. marijuana reform, with HHS recommending reclassification, signaling federal acknowledgment of marijuana’s medical potential. Industry stakeholders await the DEA’s response, underscoring the significance of ongoing developments.

The DEA follows CSA and APA procedures. A good example would be the shift from Schedule III to II of the Hydrocodone Combination Products (HCPs) in 2014.

  • 2004: The DEA received a petition.
  • 2012: Former President Barack Obama signed the FDA Safety and Innovation Act.
  • February 2014: The DEA proposed HCPs’ rescheduling.
  • August 2014: The DEA finalized the rescheduling.
  • October 2014: HCPs’ rescheduling took effect.

According to sources, the process may take up to nine years in the U.S. Court of Appeals.

Cannabis Banking Reform

Senate Majority Leader Chuck Schumer (D-NY) renewed his efforts for cannabis banking reform on April 5, aiming for swift passage. Although the Senate Banking Committee endorsed the SAFER Banking Act, allowing banks to work with cannabis firms, it awaits approval by the full Senate.

Schumer highlighted this legislation in a letter outlining legislative priorities, emphasizing bipartisan backing. Representative Nancy Mace (R-SC) echoed bipartisan support, urging Republicans to endorse cannabis banking reform to bolster their House majority, suggesting it as a strategic move to attract Democratic votes.

Responding to public opinion, two proposed changes align with voters’ preferences. A poll made by the Pew Research Center says that about 88% of adults surveyed expressed their support for cannabis use, whether for medical or recreational purposes.

Jesse Ventura, Minnesota’s former governor, also supports the movement and has launched his line of cannabis products. The products emphasize boldness akin to his politics.

While Minnesota is in the process of establishing legal sales, Retro Bakery, Ventura’s partner, offers hemp-derived THC products, permissible under state law.

Moreover, current U.S. Treasury Secretary Janet Yellen also supports the cannabis banking legislation. She backed the movement as much as she supported the SAFE Banking Act. The said act allows financial firms to work with cannabis businesses that are state-regulated. Yellen also emphasized the importance of addressing this issue in the legislation during a House Appropriations hearing.

Initially introduced in 2019 and rebranded as SAFER Banking, the bill passed a markup hearing in the Senate Banking Committee but awaits a packed Senate hearing.

Bottom Line

The cannabis sector is seeing some light on the horizon, and investors should consider these stocks as viable, despite the rather terrible few years they’ve had since Canadian legalization in late 2018.

There are certainly some catalysts to point to suggesting growth could return to the space. But we’ll see how much headway the legal market can make. Let’s just say Canada’s experiment hasn’t been as great as anticipated.

I’m on the fence about cannabis stocks for now. Indeed, they’re cheaper than they’ve been in a long, long time. But the question is whether the growth will match up to the hype, even if legalization takes hold.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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