Cannabis stocks quickly gave back virtually all the federal reform-related gains they made in December. The AdvisorShares Pure U.S. Cannabis (MSOS) is down 28%. That’s not too surprising. The sector is retail (read: emotion) driven.
But the rescheduling-related roller-coaster ride in cannabis is far from over. More reform rallies and pullbacks lie on the near-term horizon.
Background Primer
Before we get into some possible timelines, here is the setup.
“Rescheduling” means moving cannabis to Schedule III from Schedule I under the Controlled Substances Act. That will save the larger publicly traded cannabis companies tens of millions of dollars each in annual tax expenses. That’s because rescheduling neutralizes an IRS rule that bars the deduction of operating expenses against the sale of Schedule I substances.
The anti-cannabis group Smart Approaches to Marijuana (SAM) President Kevin Sabet thinks rescheduling would save the entire cannabis industry more than $2 billion in tax revenue.
Back in late December, President Donald Trump ordered Attorney General Pam Bondi to put out a rescheduling rule “expeditiously.” No one knows what that really means, but here are the key catalysts that lie ahead, and my best guess on the timing.
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Volatility Timeline Details
The volatility will play out in three phases.
1) Strong rally ahead. Bondi will put out a rescheduling rule by the end of February. The longer it takes, the better it is for cannabis reform advocates and investors, because it suggests the Department of Justice (DOJ) is writing the rescheduling order in a way that will make it more difficult to challenge.
2) Followed by a pullback. Cannabis reform advocates like SAM and others will immediately file challenges to the rescheduling rule in court. No doubt, they already have those briefs largely written, though of course, they will tweak them based on exactly how the rule is written. These cannabis reform opponents will ask for a “stay,” or suspension, of the rescheduling rule. Though these legal challenges are largely expected, the headlines will cool off the rescheduling rule rally, and probably even reverse it. At the very least, cannabis investors will revert to what I call “Bored Ape mode,” and the sector will drift lower.
3) Then a rescheduling rally redux. To get a stay, cannabis reform opponents will have to show they have standing, that they will be harmed by the rescheduling rule, and that they ultimately have a likelihood of winning based on the merits of their case. The DOJ and cannabis reform advocates will file briefs making the case that the stay request is flawed. The judge will rule on the stay request within a month or two, or possibly sooner.
I’ve covered criminal and civil court proceedings for years, so I am aware that it’s always tough to predict how court cases will turn out. It’s tough to know whether a judge will grant a stay. However, I’m going to guess the judge will not do this, for two reasons.
1) President Trump obviously really wants rescheduling. He went ahead with his rescheduling order despite some pretty strong opposition from within his party. This means President Trump’s DOJ will file aggressive briefs making the case that the stay request is flawed. So will private sector cannabis reform advocates. They will make the case that rescheduling opponents do not have standing, that they won’t be harmed by rescheduling and that they have little chance of winning in a legal proceeding.
2) Even though the stay decision will be made on the legal merits, there is political and popular momentum for the change. Polls continue to show a majority of voters favor cannabis legalization in some form. Consumers continue to vote in favor of cannabis with their wallets. Cannabis sales keep hitting record highs in states that have legalized – including in more conservative Heartland states and despite ongoing price deflation. And both Democratic and Republican administrations have sought rescheduling. It’s that rare instance where parties on both sides of the aisle actually agree on something, in this highly polarized political environment.
Indeed, Trump and Congress recently reiterated tacit support for cannabis reform. The Senate in early January confirmed President Donald Trump’s pro-cannabis pick for White House drug czar. The candidate, Sara Carter Bailey, supports medical cannabis legalization. Bailey will serve as director of the Office of National Drug Control Policy (ONDCP), which helps create and implement White House drug policy. The U.S. House of Representatives recently approved a spending bill that would continue to protect state medical cannabis sales by blocking the DOJ from interfering, a provision in place since 2014.
Of course, if the court does grant the stay, that’ll be bad news for cannabis investors and companies in the sector. That’s because the subsequent court case on rescheduling could drag out for a year or two.
The bottom line: There are plenty of ups and downs ahead for aggressive cannabis traders. I’ve outlined the catalysts and their possible timing above. Ultimately, if rescheduling holds up, which I believe is probable, that builds the case for long-term, buy-and-hold positions in the space, which will also benefit from more states flipping to legalization. For the best cannabis-related stocks to consider trading or holding for the long term, including income plays yielding 11%-16% and biotech stocks, consider subscribing to Cabot Cannabis Investor here.
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