Cannabis stocks are up 14% in the past month, handily beating market gains of around 3.5%.
What’s going on?
The sector strength is a signal that the long-awaited federal rescheduling of cannabis may be on the horizon.
Now that the federal spending bill is out of the way and Middle East tensions have calmed down, the administration of President Donald Trump may be free to focus on other domestic policy issues.
With key midterm elections around the corner, Trump and the Republicans need domestic policy victories to win over younger voters. Polling consistently shows that voters, younger voters and voters in both parties want cannabis reform. Trump promised rescheduling during his election campaign, and he backs federal banking reform, overt moves to win over Democrats and young voters in swing states.
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The background here is that moving cannabis to Schedule III from Schedule I under the Controlled Substances Act would help cannabis companies by neutralizing an IRS provision that bars them from deducting operating expenses. Banking reform would allow banks to serve cannabis companies and permit credit card use in cannabis stores, moving the sector away from its cash-only status.
5 Other Reasons to Be Bullish on Cannabis
Here are five other positives in the mix.
1) Technicians would speculate that the sector may have put in the proverbial double bottom on April 8 and June 23. The AdvisorShares Pure U.S. Cannabis ETF (MSOS) bottomed at around $2.08 on both days, and it recently sold for $3.08.
2) We await the appointment of Terrance Cole to become the administrator of the Drug Enforcement Administration (DEA), which is charged with advancing rescheduling. His appointment would be the next step in advancing rescheduling. News here would be a catalyst. Though, technically, the Department of Justice (which houses the DEA) could advance rescheduling on its own.
3) A new poll recently found that nearly all Americans support legalizing cannabis in some form. The Pew Research Center poll found that 87% of Americans support the policy shift. About half, or 54%, say cannabis should be legal for both medical and recreational use, while another 33% think it should be legal just for medical use. Broken out by age, race or political party affiliation, a majority of respondents supported legalization. Only 12% say cannabis should be totally illegal. Democrats were most likely to favor some kind of legalization, at 93%. But 81% of Republicans support some form of legalization, either recreational use or medical use.
4) A top advisor to President Trump’s Never Surrender PAC, Alex Bruesewitz, recently criticized federal cannabis policy because it classifies cannabis as more dangerous than fentanyl. In a post on X, he called the classification “illogical” and noted that a majority of Republican voters back rescheduling. “During the campaign President Trump expressed support for rescheduling cannabis to Schedule III, maintaining its illegal status but clearing the path for more robust medical research in our country,” Bruesewitz wrote. “No brainer!” Trump has publicly praised Bruesewitz and his firm, X Strategies, which has assisted dozens of Republican candidates.
5) A group of high-profile athletes recently asked the White House to pick up the pace on three key cannabis reforms. The group, including boxer Mike Tyson and NBA superstar Kevin Durant, asked President Donald Trump in a letter to enact clemency for cannabis offenders, cannabis rescheduling, and cannabis sector banking reform. Ongoing support for change from the sports world is more evidence of the cultural shift in favor of cannabis policy reform.
Potential Challenges
Of course, reform efforts could go off the rails. Here are two reasons to be cautious.
1) Trump is not following through 100% on his “promises made, promises kept” mantra. He failed on exempting social security payments from federal taxes, for example. The increase in the standard deduction for seniors only provides a small portion of the tax relief that full exemption would have granted.
2) A recent raid on the cannabis grower Glass House Brands (GLASF) has put a cloud over the cannabis sector. In the raid, the Department of Homeland Security said it found illegal immigrant workers, including migrant children. In a recent statement on X, the company said it “does not and has never employed minors.” This development is a bad look for the cannabis sector. More clarity from the company would help, but Glass House did not immediately respond to a request for comment on July 16.
What to Do Now
I think it makes sense to add a mix of plant-touching companies and companies that lend to cannabis companies instead of growing and selling the product. Cannabis lenders pay nice dividend yields in the 13% range, so you get paid to wait. But they would also see capital appreciation in a positive reform scenario. Plant-touching names will move significantly higher on signs of progress on cannabis reform. For my favorite names, consider subscribing to Cabot Cannabis Investor here.
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