Cannabis stocks giveth and cannabis stocks taketh away.
The cannabis sector advanced 76% this month through August 13th, using the AdvisorShares Pure U.S. Cannabis (MSOS) as a reference. They are down 15% since then.
What’s going on, and what is the best way to trade the sector now?
First, the good news.
We continue to get high-profile confirmations that the administration of President Donald Trump will reschedule cannabis. This really isn’t news. I’ve been saying this since Trump promised rescheduling in his election campaign a year ago. But mainstream media attention is drawing money into the sector.
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The Wall Street Journal sparked the recent leg up with an article late last week confirming that Trump told donors at a dinner that he plans to act on rescheduling soon. That led to a question about rescheduling in an August 11 press conference in which Trump confirmed his administration would act on rescheduling in “the next few weeks.” Rescheduling is a question of when, not if, agrees Curaleaf (CURLF) CEO Boris Jordan.
Why It Matters
* Rescheduling, or moving cannabis to Schedule III from Schedule I under the Controlled Substances Act, would help cannabis companies by boosting their cash flow. It would neutralize an IRS provision that bars them from deducting operating expenses (called 280E).
* Rescheduling would make it easier for cannabis advocates to get banking reform that would allow banks to serve cannabis companies. That would make financing easier and permit credit card use in cannabis stores, moving the sector away from its crime-magnet, cash-only status.
* Rescheduling would make the management of cannabis companies easier since, right now, managers have to plan for contingencies. “We all have to develop multiple plans,” says Charlie Bachtell of Cresco Labs (CRLBF). “You spin a lot of plates. Rescheduling would allow us to focus on other things.”
As rescheduling surfaced in the mainstream press in the past week, influential Trump advisors were quick to endorse the change on social media. This matters because it hints at which way Trump will go on rescheduling. This is not entirely clear (details below).
“This is an 80-20 issue among all voters and a 70-30 issue for republican voters,” Trump advisor Alex Bruesewitz posted on X. “If President Trump does decide to move forward with this it will be well received. Also to be clear, rescheduling isn’t legalizing. Big difference and those suggesting otherwise are being dishonest…Schedule 3 still keeps it as a crime, but would allow for medical research. Most Veterans I know supports [sic] this as well.” Bruesewitz is CEO XStrategies, which advises Trump.
“As long as federal prohibition lingers, cartels and traffickers rake in the cash while the U.S. forfeits billions in tax revenue and job creation,” wrote influential conservative Bruce LeVell on X. “Legalize it, regulate it, and we can starve the black market, create thousands of good-paying jobs and boost local economies.”
The Bad News
So why is the sector pulling back? I’ll cite these reasons.
* It’s not unusual for sectors or stocks to retrace a third of a big upmove. But there are also more serious concerns.
* Trump continues to hedge on rescheduling. He fully endorsed it on the campaign trail, but now he’s signaling less certainty about the change. He hinted he hasn’t made a final decision yet in his August 11 press conference. He endorsed medical use (as he did on the campaign trail), but he was also negative on broader cannabis use, singling out concerns about youth access. “I’ve heard great things having to do with medical and bad things having to do with just about everything else,” he said.
This nuanced view does not obviate rescheduling. Rescheduling would promote medical research, which Trump seems to want. But the hedging language makes you wonder if Trump might find a way to promote medical research and use, without actual rescheduling.
* As a political tool, cannabis rescheduling would be better deployed closer to the midterm elections for greater impact. Trump and the Republicans need domestic policy victories to win over younger voters. Polling consistently shows that voters, younger voters and Democrats in particular, want cannabis reforms like these.
“This is a very popular subject, and they will use it when they feel it is good for them not for us,” says Jordan, at Curaleaf. “Hopefully those two things align and we get rescheduling this year. But we might not get it until next year.”
What to Do Now
Cannabis companies have over $2 billion in debt maturing in the next fifteen months. It will need to be refinanced. That’s a lot of debt to turn over in a market where money is expensive and lending capacity is relatively scarce.
Therefore, it pays to go with companies that are most successful at managing their financial strength. For a short list of these, consider subscribing to Cabot Cannabis Investor.
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