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2 Big Reasons to Believe in the Coming Cannabis Stock Rally

Political brinksmanship and dysfunction have derailed the summer’s rally in cannabis stocks, but despite muddy political waters, there are still catalysts to fuel a resurgent rally.

Sparklers and Champagne Glasses

After a promising rally in late August on news of possible rescheduling, cannabis stocks drifted lower through the late summer, culminating with a steep drop following the selection of Rep. Mike Johnson (R-LA) as the new Speaker of the House of Representatives.

From a post-rally high on September 11 to the low on October 30, cannabis stocks, as represented by the AdvisorShares Pure U.S. Cannabis (MSOS) exchange-traded fund (ETF), fell more than 44%. That said, they are currently more than 25% off those lows (at the time of writing) partially owing to a broader rally in equities.

I understand why cannabis stocks declined on the Johnson news. One hope among cannabis investors has been that Congress will soon approve banking reform called the Secure and Fair Enforcement Regulation (SAFER) Banking Act. This would help cannabis stocks because it would allow banks to provide credit card and financing services to companies that legally sell marijuana. SAFER was approved by the Senate Banking Committee on September 27.

On the surface, the angst among cannabis investors over the choice of Johnson as House speaker seems to make sense. But it is misplaced. I get the concern, because Johnson is not cannabis-friendly. He voted no on a prior version of SAFER. He has consistently voted against cannabis-related legislation, and he abstained from voting on bills to legalize cannabis.

But there are two reasons why Johnson matters less to the group than the sellers of cannabis stocks think.

SAFER Progress

For insights on cannabis issues from Washington, D.C. it’s a good idea to pay attention to what the leadership at Curaleaf (CURLF) and Cresco Labs (CRLBF) are saying because they spend so much money on lobbying efforts there.

Curaleaf chair Boris Jordan believes Senate majority leader Charles Schumer (D-NY) will soon announce a floor vote on SAFER, which may be more likely now that a potential government shutdown is no longer on the table. It’s always tough to predict the timing of actions by politicians especially now that they have other serious issues to deal with like war in the Middle East. But if he is right, it will be a major catalyst for cannabis stocks.

Jordan also thinks SAFER could still make it through the House of Representatives. One path would be for Schumer to put SAFER into “must pass” legislation like a budget bill, he says. Members in the House would not oppose this, says Jordan, because so many of them have voted in favor of SAFER in the past.

A recent survey paid for by the American Bankers Association (which wants SAFER approved because it would create new business for banks) found that 55% of Americans say they want Congress to pass a law allowing banks to serve cannabis companies in states where marijuana is legal.

Progress on Rescheduling

Cannabis stocks nearly doubled beginning in late August when we learned that the Department of Health and Human Services (HHS) recommended the rescheduling of cannabis under the Controlled Substances Act (CSA). HHS recommended cannabis be moved to Schedule III from Schedule I. The change would help cannabis companies by allowing them to deduct expenses against income in federal tax returns.

The next step in this process will be the publication of a proposed rule on rescheduling by the Drug Enforcement Administration (DEA). Consensus holds this will happen by year’s end. The Congressional Research Service (CRS) says the DEA is likely to go along with the HHS recommendation, given its track record of nearly always doing so in the past. Since this is a matter promulgated by the Biden administration internally, who leads the House is not very relevant.

The bottom line: News on rescheduling progress will be a meaningful catalyst for cannabis stocks.

For analysis of other big cannabis group catalysts on the horizon and when they will hit, and the best companies to own as a play on these developments, subscribe to Cabot Cannabis Investor today.

Michael Brush is an award-winning Manhattan-based financial writer who writes a stock market column for MarketWatch. He is editor of Brush Up on Stocks, an investment newsletter. Brush previously covered the stock market, business and economics for the New York Times, the Economist Group, MSN Money, and Money magazine.