In the last week of August, the Drug Enforcement Agency (DEA) handed the cannabis sector a dose of bad news in the form of a formal hearing on rescheduling cannabis.
That unexpected announcement, which torpedoed hopes of rescheduling before the election, set a hearing for December 2 and triggered an immediate sell-off in marijuana stocks.
Cannabis company executives were left feeling “bamboozled, befuddled and blindsided,” said one industry expert familiar with their thinking. “It is like they have been hit by a bus.” Investors were no better off, given the 10%-15% declines in their cannabis stocks.
They were all caught off guard because so many political “insiders” had made the bullish prediction that rescheduling would happen before the election. Rep. Nancy Mace (D-SC) made that call in an interview literally hours before the DEA shot down this scenario.
Rescheduling, which means moving cannabis to Schedule III from Schedule I under the Controlled Substances Act, would help cannabis companies by significantly boosting cash flow by neutralizing an IRS rule that blocks the deduction of operating expenses against revenue from Schedule I substance sales, like cannabis (Rule 280E).
The DEA decision is not good news, but I am more of a buyer in the weakness, not a seller. For five reasons:
Sentiment is overly bearish. Anything is possible, but it is hard to imagine sentiment getting more negative towards the cannabis group. Generally, times of negative sentiment extremes are times to buy, or at least not sell.
Fundamentals are solid. Cannabis stocks now trade below where they traded on October 6, 2022, when rescheduling first popped up as a possible catalyst because President Joe Biden said he directed his administration to get it done.
But the sector is much better off now. “From a business perspective, I couldn’t be more excited,” Curaleaf CEO Boris Jordan told me in an interview on August 28.
What’s gotten better in the sector?
* Back in 2022, there was talk of sector bankruptcies because of declining product prices and heavily leveraged balance sheets. Today, top-tier companies have cleaned up their balance sheets so much that three of them have buyback plans.
* Big states have legalized recreational use since October 2022 – like Ohio and Maryland. There are more on the way, including possibly Florida and Pennsylvania. New York sales are finally taking off because of deregulation and stepped-up enforcement against unlicensed stores. Europe has made progress in cannabis market reforms led by Germany and the U.K. “Europe is booming,” says Jordan, who has been aggressively building out his company’s retail presence in Germany and the U.K., and its supply chain in Portugal. More European countries will liberalize rules on cannabis use and sales, following Germany’s lead.
* A lot of excess capacity has gone away so price compression is winding down in many markets. “There is definitely still price compression in Florida, Pennsylvania and Arizona, but we are coming to the end of the cycle. Some of the markets are stabilizing,” says Jordan.
Rescheduling is delayed, not dead. The DEA’s announcement that it wants to hold an ALJ hearing does not mean rescheduling will not happen. After all, if the DEA wanted to shoot down rescheduling it would have simply announced that it is rejecting the change.
But the ALJ hearing does push out the timeline, and maybe by a lot. History shows ALJ hearings can drag out literally for years. Or they can be brief.
Which will it be? No one knows. But Jordan offers this forecast: “My view is it is a mid- to end-2025 decision.”
One problem here is the DEA has a built-in bias against change, even though voters generally support cannabis reform including legalization, according to polls. The DEA bias stems from the fact that a lot of the DEA’s budget is linked to cannabis law enforcement. Any move in the direction of legalization could threaten its budget.
On the bright side for reform advocates and cannabis investors, Vice President Kamala Harris and Minnesota Governor Tim Walz both favor legalization. I call them the cannabis dream team, because of their positive record on cannabis reform. Harris supports legalization, and Walz has actually done it, in Minnesota. Even Donald Trump has made positive comments about cannabis reform recently, suggesting a softening of his stance.
The presidential election is now even more important. Because a rescheduling timeline is so difficult to predict, scheduling the ALJ hearing on the topic for after the elections politicizes cannabis that much more. Progress on federal-level cannabis reform now depends even more on the presidential election outcome.
The DEA hearing-related delay “likely leaves the final rescheduling decision to whomever wins in November,” concludes TD Cowen analyst Jaret Seiberg. “We believe both candidates are likely to let rescheduling advance, though we have more confidence in Kamala Harris than in Donald Trump. We believe Kamala Harris would support moving cannabis to Schedule III. It is why we believe if she wins rescheduling will occur in 2025.”
Polls and betting sites suggest Harris-Walz are in the running to win, though it is still early. Several polls show that voters in key swing states support cannabis reforms like legalization, rescheduling and allowing banks to serve cannabis companies. The surveys in Michigan, Pennsylvania and Wisconsin were done by The Tarrance Group and funded by Scotts Miracle-Gro.
Cannabis is gaining acceptance. There continues to be a growing acceptance of cannabis and its use in the U.S. We see this in poll results; the removal of cannabis from lists of forbidden substances among sports leagues and employers, most recently Home Depot (HD); and ongoing rapid retail sales growth, including in conservative Midwestern states.
For example, recreational-use sales are taking off in Ohio, since they began on August 6. During August 6-17, recreational-use sales came in at $22.5 million, and medical-use sales were $16 million. The $38.5 million tally was more than double the $18 million during the same period last year.
It stands to reason that the growing acceptance and popularity of cannabis could sway politicians to have more favorable views on cannabis reform.
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