The cannabis sector is taking a severe body blow because of election outcomes.
The big negative: Florida voters rejected Amendment 3, which would have legalized recreational use. Voters in North Dakota and South Dakota also rejected cannabis legalization.
These are definite setbacks. But investors are acting like the sector will be dead forever. I believe the outlook for the business of cannabis is not as grim as the sharp selling today suggests.
The main reason I’ll cite is that President-elect Donald Trump is on board with significant cannabis reform. There are also some near-term catalysts that could play out in December and early 2025.
Here’s a roundup of four key factors to keep in mind.
1) Trump supports key reforms.
Cannabis investors are suffering from a severe case of post-election amnesia. They’re forgetting that Trump supports key cannabis reform that the sector needs. Here are the three main examples.
* Trump implicitly supports legalization. We know this because Trump openly backed Amendment 3 in Florida, which would have legalized recreational use. He also clarified his policy stance during the campaign in a statement posted on social media. It said: “Someone should not be a criminal in Florida, when this is legal in so many other states. We do not need to ruin lives & waste Taxpayer Dollars arresting adults with personal amounts of it on them, and no one should grieve a loved one because they died from fentanyl laced marijuana.”
He also posted: “I believe it is time to end the needless arrests and incarcerations of adults for small amounts of marijuana for personal use. We must also implement smart regulations, while providing access for adults, to safe, tested product.”
* Trump supports rescheduling. This means the movement of cannabis to Schedule III from Schedule I under the Controlled Substances Act (CSA). The change would boost cannabis company cash flow and open the door for meaningful medical research.
During the election, Trump said medical cannabis is “absolutely amazing” for patients. He said his administration would “continue to focus on research to unlock the medical uses of marijuana to a Schedule 3 drug.”
* Trump supports key banking reform. The changes would allow banks to serve cannabis companies. A bill called the SAFER Banking Act has been kicking around Washington, D.C. for a while. Trump wants it to become law. During the election he posted on social media that he wants to “work with Congress to pass common sense laws, including safe banking for state authorized companies, and supporting states’ rights to pass marijuana laws, like in Florida, that work so well for their citizens.”
The big question is whether Trump will follow through. Certainly, he’s got bigger issues to deal with like budget issues and immigration. So, it may take some time. But historically, at least, Trump has attempted to follow through on stated policy objectives.
2) Rescheduling remains as a potential catalyst, as soon as the first quarter of next year.
The background here is that the Department of Health and Human Services (HHS) has asked the U.S. Drug Enforcement Administration (DEA) to move cannabis to Schedule III from Schedule I under the CSA. This would boost cash flow at cannabis companies by neutralizing an IRS provision that blocks the deduction of operating expenses against revenue from the sale of Schedule I substances.
The most important angle here is that – as noted above – Trump supports rescheduling. It’s not unreasonable to think he will appoint leaders at the DEA and its parent agency the Department of Justice who will continue efforts to promote the change. Appointments here will offer a clue on the outlook for rescheduling.
We should get a status update on rescheduling in DEA hearings on the matter early next year. Important rescheduling hearings that had been set to begin December 2 recently got pushed back to January or February on a technicality.
Administrative Law Judge John Mulrooney cited the need for more information about the witnesses slated to testify. The judge is worried that information potential witnesses provided did not clarify whether they support or oppose the proposed changes, or whether they have standing, or an interest in the outcome. To have standing, a witness has to be “adversely affected or aggrieved” by a proposed rule.
The Cannabis Industry Practice Group at the law firm Foley Hoag calls the delay a minor setback in the timing of rescheduling. On the upside, the steps being taken by the judge should reinforce the validity of any eventual ruling based on the hearing by making sure that witnesses are qualified. This could make a final ruling on rescheduling more resistant to legal challenge.
3) Testimony in a key court case will happen soon.
On December 5, a federal appeals court will hear testimony in a case challenging the legality of the federal government’s cannabis prohibition. Though the merits of the suit remain in question, cannabis stocks may rally into the hearing date.
Verano and other cannabis companies argue in the suit that federal cannabis prohibition is unconstitutional. They claim the federal government only has a right to regulate interstate commerce. This means that intrastate cannabis business contained inside state boundaries is off limits, they say.
The plaintiffs also argue Congress has “dropped any assumption that federal control of state-regulated marijuana is necessary.” The suit claims Congress “has abandoned its goal of eradicating marijuana and has, in fact, expressly exempted it from federal enforcement in certain circumstances.” This is a reference to federal budget law that contains a provision preventing the use of federal funds to interfere with state medical cannabis programs.
The U.S. Court of Appeals for the First Circuit in Boston will hear the testimony. The suit has been filed by Boies Schiller Flexner LLP and another law firm.
4) Recreational-use legalization is not off the table in Florida.
The Florida “no” vote on recreational use legalization is a big negative because the state is large, and it has a big tourist industry. But recreational-use legalization is not permanently off the table in Florida.
Other states have attained recreational-use legalization through lawmaking, as opposed to referenda. And that’s still a possibility in Florida.
After Floridians rejected Amendment 3 which would have legalized recreational use, Trulieve CEO Kim Rivers posted on X that it’s not yet game over. She said she is “looking forward to working with the legislature on the next steps to ensure safe access to marijuana for adults in Florida, decriminalization for personal possession and home grow.”
The reality is legislative reform in Florida will take a long time, and there is no guarantee that it will happen. But cannabis companies will work on getting rec-use legalization through by law.
Not All Grim on the Election Front
The following jurisdictions are a lot smaller than Florida, but their voters did approve legalization or decriminalization on election day.
* Many Texas voters approved cannabis decriminalization. Voters in Dallas, Lockhart and Bastrop favored cannabis decriminalization by a two-thirds margin. In Dallas, 66% voted yes, while 67% of Lockhart voters approved the change, and in Bastrop, 69% voted yes.
* Nebraska voters approved medical cannabis legalization. They approved a referendum that would require lawmakers to establish protections for medical cannabis possession and doctors who recommend it, and another that would set up a commission to create a regulatory framework for medical cannabis. The referenda face legal challenges over the validity of signatures gathered to support them.
Don’t Forget Europe
Cannabis reform continues in Europe. In Germany, which is leading the way, sales of medical cannabis are booming, and so-called cannabis clubs have started to distribute product. Sales at pharmacies have been growing so fast since Germany took cannabis off its narcotics list in April, that suppliers cannot keep up. The change – taking cannabis off the narcotics list – makes it easier for doctors to recommend medical use of cannabis.
What to Do Now
The selling in cannabis names November 6 feels like a gut punch. But the industry is not dead, and potential reforms and catalysts remain on the horizon, particularly given Trump’s stated support of reform.
So, it makes sense to consider averaging down here. At the very least, it makes sense to avoid joining the negative crowd, by selling.
To average down, consider portfolio names: Ayr Wellness (AYRWF), Cresco Labs (CRLBF), Curaleaf (CURLF), Cronos (CRON), AdvisorShares Pure U.S. Cannabis (MSOS), AdvisorShares MSOS 2X Daily (MSOX), ETFMG Alternative Harvest (MJ), Green Thumb (GTBIF), Organigram (OGI), Tilray Brands (TLRY), Trulieve (TCNNF) and Verano (VRNOF). For simplicity, consider getting exposure via MSOS or the leveraged version, MSOX.
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