State-level recreational cannabis legalization has been spreading rapidly over the last decade-plus, expanding from just two states in 2012 to 24 states and the District of Columbia today.
Medicinal use is even more widespread; it’s currently accessible in 38 states, four territories and D.C.
But despite the progress, cannabis investors have been repeatedly burned by federal inaction that has throttled access to banks and capital by cannabis companies, as well as tax laws that prevent these companies from operating in the same manner as in other industries.
There are signs that this is finally changing, perhaps as early as this year. So with a promising year upon us, here are three reasons to buy cannabis stocks.
1) The U.S. moves cannabis to Schedule III from Schedule I under the Controlled Substances Act.
The change puts a strong bid under cannabis stocks because of the positive implications for companies in the space. While falling short of technically legalizing cannabis at the federal level, the change increases cash flow dramatically by wiping out the impact of an Internal Revenue Service (IRS) rule that bars companies from deducting most expenses. Known as Rule 280E, the provision means cannabis companies pay around a 70% tax rate.
The federal government does get around to putting excise taxes on cannabis, which vary depending on potency as with alcohol. But the net change still boosts cash flow dramatically at cannabis companies.
If I’m right, rescheduling will have happened at lightning speed. Rescheduling review requests can take as long as nine years to process, notes Shane Pennington, a controlled substances regulatory expert at the law firm Porter Wright Morris & Arthur.
But the tighter timeline I’m predicting comes from Howard Sklamberg, a regulatory expert at the law firm Arnold & Porter. He knows the system because he was chair of the Food and Drug Administration’s Marijuana Working Group for years. A quick turnaround makes sense because President Joe Biden has made cannabis reform a top priority. He wants a win to use in his upcoming political campaign.
The next step in rescheduling is Drug Enforcement Agency publication of a proposed rule. This could happen as soon as April. “April 20 is a good date to do it,” quips Curaleaf (CURLF) board chair Boris Jordan. That’s a reference to “420” which is slang for cannabis, but he’s serious about the possible April timeline for this catalyst.
2) Cannabis sector sales growth picks up to 10% to 15% as more state markets develop.
Ohio, which just legalized recreational use, sorts out its regulations, and rec-use sales advance sharply all year, reflecting trends in states like New Jersey, Connecticut and Maryland after legalization of rec use. The New York market finally opens up as cannabis companies win licenses following their successful challenge of rules which had effectively excluded them in favor of social justice applicants. New York legal market growth is bolstered by a state-wide crackdown on illegal stores.
Floridians get to vote on a rec-use legalization referendum in the 2024 elections and they approved it by a narrow margin. Rec use comes online in 2025 in Florida, but the 2024 vote supports cannabis stocks right away because the state will be such a large market, given its population size and tourist traffic. Pennsylvania, now surrounded by states that allow legal rec-use sales, succumbs to pressure to do the same. It makes significant progress towards legalization, even if it doesn’t cross the finish line in 2024.
3) The liberalization of European cannabis laws continues, setting the stage for the development of a market similar in size to the U.S. market.
Germany leads the way, by taking cannabis off its narcotics list. This allows doctors to recommend medical cannabis to many more patients. Germany develops into a large market in its own right, given its population of 83 million. Sales in Germany grow by as much as fivefold. But the change sets the tone for liberalization in other European countries, as Poland and other nations join the U.K. and Germany in relaxing the rules on cannabis sales.
For more fearless predictions about the cannabis sector and the best companies and exchange-traded funds to own as a play on these developments, consider subscribing to Cabot Cannabis Investor today.
