As a general rule, some of your best stock purchase decisions will be the ones that are the hardest to make.
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.
Cannabis stocks remain oversold, and cannabis investors are in a depressed state (a counterintuitive buy signal).
Yet 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 favor reform, including legalization of recreational-use sales.
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 and could spark marijuana stocks.
The DEA Development
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.
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, which may encourage the DEA to keep the hearing brief.
A shorter timeline and an easier path to rescheduling would both be bullish for marijuana stocks.
