Proactive Investors - Cannabis stocks surged on Tuesday afternoon following multiple media reports that the US Drug Enforcement Administration will approve the reclassification of marijuana as a lower-risk drug.
The news was first reported by the Associated Press, which cited five people familiar with the matter.
The DEA reportedly will approve a recommendation from the Department of Health and Human Services that would reclassify marijuana from Schedule 1, where it sits alongside heroin and LSD, to Schedule 3, like testosterone and codeine.
A Biden administration official told media the Justice Department “continues to work on this rule.”
The move would be significant as it would mark the first time the US government has acknowledged the plant’s potential medical benefits by facilitating its research.
Analysts at Jefferies see the move as a major catalyst for the cannabis space.
Firstly, they believe it will provide businesses with increased institutional access. They wrote that the move will “materially de-risk cannabis from an investment perspective in the eyes of many institutions.”
“We've written many times how the major reason current multiples are depressed is lack of institutional ownership, this due to a combination of major exchanges not willing to list the stocks due to its current drug classification/federal illegality, and/or institutions not being able to invest due to not being on a major exchange or compliance/legal concerns arising from the current drug classification/federal illegality,” they wrote.
“Whether Schedule 3 alone is enough for major exchanges to allow listing remains to be seen, but we think prospects are much improved if we see Schedule 3 and other incremental reform such as SAFE Banking, and potentially a new Cole Memo.”
Second, the analysts see the reclassification as a huge boost to cannabis companies’ cashflows with the removal of federal tax provision 280e, which effectively results in corporate tax rates above 80%.
“This would provide a huge boost to company cashflows, with most major operators already turning cashflow positive after restructuring/efficiency efforts over the last year or so,” they wrote.
They also see the move to Schedule 3 as improving the prospects of the full federal legalization of marijuana in the US within the next five years.
“A critical piece of this move is making it easier to study cannabis and thereby fill in the data gaps where there may be concerns around its widespread use among the population,” they wrote.
They added: “Near-to-medium-term growth could be boosted in a number of ways such as: encouraging more states to legalize, destigmatizing cannabis in the eyes of consumers that leads to greater usage, and making it easier for dispensaries to do business (these are more impacted by 280e than cultivators/manufacturers) thereby boosting industry wholesale/brand building/availability.”
On the rescheduling reports, the Advisorshares Pure US Cannabis ETF, a fund dedicated to US cannabis companies, surged 21.2% to $10.94.
Meanwhile, the Advisorshares Pure Cannabis ETF (NYSE:YOLO), which provides exposure to global cannabis firms, was up 17.4% at US$4.45.
Major gains were seen by cannabis beverage company Nevis Brands (CSE:NEVI, OTCQB:PSCBF), whose Canadian-listed shares surged 44.5%.
Tilray Inc (NASDAQ:TSX:TLRY) added 28.2%, Green Thumb Industries Inc (CSE:GTII) 21.3%, Curaleaf (TSX:CURA) 20.2%, TerrAscend Corp. (CSE:TER, OTCQX:TRSSF) 19.3%, SNDL Inc (NASDAQ:SNDL) 15.4%, and Cronos Group (TSX:CRON) Inc 10.5%.
Canada-based cannabis firms were also buoyed by the news, with Canopy Growth (TSX:WEED) up 34% at $11.15 and Aurora Cannabis Inc (TSX:TSX:ACB,gaining 22% at $7.70.