Cannabis investors remain in a depressed state. Counterintuitively, this is a signal to buy the group.
The best time to buy stocks is when they are widely hated, but plausible catalysts lie on the horizon. This is clearly the case with cannabis stocks now.
Admittedly, with sentiment so negative, it’s hard to buy cannabis stocks. That resistance may be a signal to buy. As a general rule, some of your best stock purchase decisions will be the ones that are the hardest to make.
Big picture, one of the most bullish factors now is that both presidential candidates openly support significant federal and state cannabis reform. This is probably because polls show the majority of voters in key battleground states like Michigan, Pennsylvania, Wisconsin, Arizona and Nevada favor reform, including legalization of recreational-use sales.
[text_ad]
Next, voters in Florida seem increasingly likely to approve a November referendum that would legalize recreational use in the state, especially now that presidential candidate Donald Trump supports the initiative. Trump is a Florida resident. The betting site Polymarket suggests 80% odds of approval.
Betting sites are often good indicators of election outcomes. With its huge presence in the state, Trulieve (TCNNF) shares would likely see the biggest gains. But the whole group would get a bounce, so the exchange-traded fund AdvisorShares Pure U.S. Cannabis (MSOS) makes sense, too.
Plus, in a little-noticed key development behind the scenes, the Drug Enforcement Administration (DEA) recently acknowledged the validity of a new, streamlined checklist for cannabis rescheduling, which would be a game changer for companies in the sector. The new checklist makes rescheduling much easier to do.
The “Geeky” Development for Cannabis Stocks
To bring you up to speed, the background here is that for a drug to move to Schedule III from Schedule I under the Controlled Substances Act (CSA), it must have some currently accepted medical use (CAMU).
When the Department of Health and Human Services (HHS) proposed rescheduling cannabis earlier this year, it created a new, two-part test to demonstrate the CAMU needed to get cannabis into Schedule III.
The proposed two-part test considers 1) whether there is widespread acceptance of the benefits of a drug in the medical field, and 2) whether there is at least some evidence supporting medicinal benefits. For geeks (like me), I offer more detail on the language in this rule, below.
The key takeaway is that this is a much lower hurdle than the previous five-part test which, among other things, set stricter guidelines for medical studies supporting conclusions about a drug’s effectiveness.
The easier, two-part test makes rescheduling cannabis to Schedule III far more likely. That would be a big catalyst for cannabis stocks. Rescheduling cannabis down to Schedule III would be a big deal because that would neutralize an IRS rule (called 280E) which effectively wipes out company cash flow and profits by prohibiting the deduction of operating expenses against income from the sale of Schedule I drugs.
The DEA’s nod of approval of the new two-part test came in a footnote to a decision placing some synthetic opioid drugs in Schedule I of the Controlled Substances Act (CSA).
The DEA’s acknowledgment of the easier two-part test isn’t really too much of a surprise. That’s because earlier this year the Office of Legal Counsel (OLC) inside the Department of Justice (DOJ) ruled that the prior five-part test was too narrow. The OLC concluded the easier two-part test “is sufficient to establish that a drug has CAMU even if the drug has not been approved by FDA and would not satisfy DEA’s five-part test.”
Here is the detailed language for the new, two-part test to demonstrate currently accepted medical use. First, there has to be “widespread, current experience with medical use of the substance by licensed health care providers operating in accordance with implemented jurisdiction-authorized programs, where medical use is recognized by entities that regulate the practice of medicine.” Second, there has to be “some credible scientific support” for use of a drug to treat medical conditions. The old five-part test set much higher standards for medical research.
The DEA has scheduled an internal, administrative law judge hearing on rescheduling, to begin December 2. There’s no telling how long that hearing may last. But President Joe Biden has expressed a strong interest in rescheduling. That may encourage the DEA to keep the hearing brief.
[author_ad]
