Cannabis stocks are thoroughly unloved and abandoned once again.
But that will change quickly, and in a big way, if any of the potential big catalysts hit between now and the end of the year. No guarantees, but this is likely.
Let’s consider the possible timeline for the biggest potential catalyst of them all, which is rescheduling.
The setup here is that the Drug Enforcement Administration (DEA) and its parent the Department of Justice (DOJ) have filed a proposed rule that would move cannabis to Schedule III from Schedule I under the Controlled Substances Act (CSA).
The jackpot for cannabis companies would be the big cash windfall. The change would neutralize an IRS rule called 280E which bars companies from deducting operating expenses against revenue from Schedule I substances. The bigger cannabis companies, like the ones in the Cabot Cannabis Investor portfolio, would see cash infusions of $50 million to $100 million. Rescheduling would be a huge catalyst.
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Predicting when, or even if, this will happen is tricky. Below, I piece together my best guesses based on my own thinking and input from Shane Pennington and Boris Jordan. Pennington is one of the leading experts on federal cannabis regulatory law. He is a partner at Porter, Wright, Morris, and Arthur. Jordan is the chairman of our Curaleaf (CURLF). His company is one of the heavyweights in Washington, D.C. cannabis lobbying.
Here are the highlights of the next steps along the way in rescheduling, and the odds of a potential pitfall derailing progress.
The Cannabis Rescheduling Timeline
* The next step in this process will be the close of public comments on the proposed rule on July 22. This event won’t be much of a catalyst.
* The significant step after that will simply be publication of the final rule. To get this done, the DOJ and DEA have to respond to substantial comments from the public. The most complicated and nuanced comments from both opponents and supporters will come during the last day or two of the comment period that ends July 22. They want to drop their comments at the last minute to limit the amount of time adversaries have to respond. In other words, once comments close on July 22, the DEA and DOJ will still have a lot of work to do.
This suggests final rule publication could take a long time.
However, that might not be the case. There’s a major political angle here in that President Joe Biden wants to use cannabis reform to attract voters, especially following the debate debacle. This means publication of a final rule could well happen before the election. Jordan, at Curaleaf, says publication of a final rule by October is “very possible.” This would be a huge catalyst for cannabis stocks, especially considering how negative sentiment is at the moment.
A Potential Pitfall
* Along the way, the whole rescheduling timeline could get thrown into turmoil if the DEA and DOJ decide to hold an internal administrative law judge hearing on the matter. This could easily add years to the process. A tricky angle here is that there’s no deadline for the agencies to tell us whether they want to hold hearings or not. “If there is a final rule, then you know there will be no hearing,” says Pennington.
Both Jordan and Pennington downplay the odds of a hearing. Pennington points out that hearings are generally the exception, not the rule. Next, in recommending rescheduling to the DEA, he says, the Department of Health and Human Services did a thorough job in presenting supporting science and sound legal logic under rescheduling guidelines set up by the CSA and various court interpretations of those rules. “The amount of process this has been through is extraordinary,” he says. “This has been extremely well vetted.”
Then there is the political angle, again. “They will not have an administrative law judge hearing if the goal of the administration is to get this done before the election,” says Jordan. “There is a political angle to this, not just a science angle.”
For more on other potential rescheduling pitfalls, other catalysts, and the best cannabis names to own, consider subscribing to Cabot Cannabis Investor here.
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