Vice President Kamala Harris has sparked a major rally in cannabis stocks by publicly urging the Drug Enforcement Agency (DEA) to hasten progress on Biden administration reforms that would boost cash flow for companies in the space.
Her comments contributed to huge gains in cannabis names from March 12 when I suggested to subscribers Cabot Cannabis Investor that weakness in cannabis names created a good buying opportunity. Since then, there’s been a 23% gain in the AdvisorShares Pure U.S. Cannabis (MSOS) a decent proxy for the group.
The DEA must reschedule marijuana “as quickly as possible,” said Harris. She described it as “absurd” and “patently unfair” that cannabis is still a Schedule I drug, along with heroin.
“I cannot emphasize enough that they need to get to it as quickly as possible,” said the vice president. “Marijuana is considered as dangerous as heroin and more dangerous than fentanyl, which is absurd. Not to mention patently unfair.” Fentanyl is a Schedule II drug, below cannabis.
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Here’s why Harris’ comments put such a big bid under cannabis names. The Health and Human Services Department (HHS) has asked the DEA to soften its stance on cannabis by downgrading it to Schedule III from Schedule I under the Nixon-era Controlled Substances Act (CSA).
The change would help cannabis companies by boosting cash flow enormously. The reform would lift cash flow by exempting companies from an Internal Revenue Service rule (called 280E). This bars the deduction of operating expenses against Schedule I drug revenue.
The next step in rescheduling should come in the form of a proposed rescheduling rule from the DEA. This is the big news cannabis investors are waiting for. The timing is critical. It probably has to happen by March or April, for the Biden administration to reap election-year boasting rights – part of the plan here. The rule needs to come out by March or April to allow enough time for comments and hearings needed to approve rescheduling before election day, or at least inside the current administration.
Doubts and Catalysts
Because of the importance of this catalyst to cannabis investors, it was a big negative to learn last week that a party to rescheduling asked the Justice Department’s Office of Legal Counsel (OLC) to weigh in on the change. The OLC is a kind of an internal, administration law firm. I’ve heard about this development from a regulatory source in Washington, D.C., and it was also covered in a Wall Street Journal article published on March 9.
“It adds a step to an already complicated process, and a decision maker that was not in the process before that everyone has to adjust around,” said one source close to the regulatory process. “The DEA could have a proposed rule sitting there. Getting the OLC involved presumably would slow things down because now they have to adjust their rule to reflect OLC conclusions.” For how long? “There is no straightforward answer,” says the source.
On the bright side, given President Joe Biden’s reference to rescheduling in the State of the Union address last week, it is obviously a priority. Biden needs progress on cannabis reform to retain support among young voters, which has been slipping away. Pew Research Center surveys show that a majority of Americans think recreational use of cannabis should be legal, especially young voters. In short, rescheduling will not be easily derailed.
Other Catalysts on the Horizon
Here are other potentially meaningful catalysts on the horizon which could improve cannabis investor sentiment from here, and push the group higher.
* First, there’s speculation again among analysts and lobbyists that full Senate may take up the SAFER Banking Act, which would allow banks to serve cannabis companies. “There are good prospects of this legislation being passed in the next few months,” says Jefferies cannabis sector analyst Owen Bennett.
Senate Majority Leader Chuck Schumer (D-NY) said in a recent press briefing that the Senate is working hard to enact SAFER banking this year, and that there is momentum in bipartisan negotiations to get this done. Amendments have scuttled it in the past. But now, two amendments under consideration offset each other, in the partisan sense. One would support cannabis conviction expungements (the HOPE Act), and the other would support gun rights for cannabis consumers (the GRAM Act).
* Another near-term catalyst might come on April 1. If the Florida Supreme Court does not rule on the language of a proposed recreational-use legalization referendum by then, it automatically gets approved, and the measure will appear on the November ballot. Survey research suggests enough voter support to approve it. Meanwhile, Pennsylvania, New Hampshire, Hawaii and South Dakota could also all make substantial progress on legalization of recreational use this year.
For guidance on the best ways to consider getting exposure in the cannabis space to these developments, consider subscribing to Cabot Cannabis Investor today.
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