Cannabis stocks look buyable in the current weakness, as a trade or as a medium-term hold.
At these levels, sentiment is dark enough to consider the group buyable in the contrarian sense.
This is more than just a technical call.
Cannabis stocks look buyable when they are down, but there are three potential near-term cannabis stock catalysts on the horizon, and possibly as soon as the middle of May.
[text_ad]
The Cannabis Stock Catalyst Ahead: We See Meaningful Progress on Rescheduling
This is the biggest potential near-term catalyst and the one likely to happen the soonest.
The background here is that the U.S. Department of Health and Human Services (HHS) has recommended that the Drug Enforcement Administration (DEA) and the Department of Justice (DOJ) move marijuana to Schedule III from Schedule I of the Controlled Substances Act (CSA).
Industry sources say the DEA has sent a proposed rule to the Office of Management and Budget (OMB) for review. They expect OMB to review the rule fairly quickly and send it back to the DEA. At that point, the DEA should publish a proposed rescheduling rule. This will be a significant catalyst.
Predicting timelines for government action is notoriously fraught with difficulty. But industry sources like Boris Jordan, founder and executive chair of Curaleaf (CURLF), expect this could happen by around the middle of May. I like to listen to Jordan on forecasts of the timing of action in Washington, D.C. because his company spends a lot on lobbyists. He’s connected. However, I’d take that projected timeline with a grain of salt since it involves the government.
There does seem to be momentum behind rescheduling, though. “We are very confident this will go through,” says Jordan. Drug law regulatory expert Howard Sklamberg, partner at law firm Arnold & Porter and former Food and Drug Administration deputy commissioner, predicts rescheduling will be in place before November.
These experts expect an accelerated timeline because they say President Joe Biden wants to show significant rescheduling progress by early September, which is when early voting starts in the presidential election. To allow time for the mandatory 60-day comment period after DEA publication of the proposed rule, and the 30 days it takes for a final rule to become effective after publication, the DEA would need to publish a proposed rule soon.
Rescheduling will provide a boost to cannabis stocks because it eviscerates the impact of Internal Revenue Service (IRS) rule 280E, which blocks cannabis companies from deducting operating expenses against revenue. “This frees up a tremendous amount of cash,” says Jordan. At his Curaleaf, the amount would be $175 million. He estimates the federal tax rate at cannabis companies would fall to around 28% from the current 70%.
Jordan thinks the rescheduling rule will become effective by September 1.
Risks
* Note that this is a very aggressive timeline by historical standards. The rescheduling process can normally take around nine years. Completion by September 1 would have it done in around two years.
* Another risk factor is that opponents of cannabis reform will no doubt challenge rescheduling in court. Jordan thinks HHS and the DEA have done a thorough enough job that rescheduling will ultimately hold up in court. But lawsuit headline risk will make cannabis stocks vulnerable to pullbacks, along the way.
“A lot of Republicans will not want to give this to the Democrats as a win because this is a major vote getter. Everybody knows that,” says Jordan. “Because of that, there will be challenges.” The challenges may result in a lower court injunction blocking the change. But Jordan predicts the government would ultimately win on appeal.
* I’ve also pointed out that predicting government timelines is notoriously difficult. The projected timelines above can only really be a rough guideline.
“You are going to see a lot of volatility over the next couple of months,” says Jordan.
Earlier, I mentioned three potential catalysts. To find out more about the other two, when they might strike, and the best cannabis stocks to own, come join us by subscribing to Cabot Cannabis Investor today.
[author_ad]
