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Is It Time to Believe in Cannabis Stocks?

Cannabis stocks have been rallying to start the year, but is it the real deal or just another false start from the oversold group?

Sparklers and Champagne Glasses

Cannabis stocks got moving earlier this year when the Health and Human Services Department (HHS) released documents supporting the major federal-level cannabis reform that the group wants to see.

Here are the basics of what you need to know as an investor.

The HHS proposal asks the Drug Enforcement Agency (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 boost cannabis company 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. “It would release a lot of investible capital into the sector,” Curaleaf (CURLF) founder and executive chair Boris Jordan tells me. Cannabis companies effectively work for the federal government, he likes to joke.

Curaleaf, for example, would get a $200 million boost. For context, the company reported $61.8 million in operating cash flow and $115.5 million in losses in the third quarter.

To make a credible recommendation, HHS had to find that cannabis has acceptable medical uses and a relatively low potential for abuse and dependence. HHS built its case by citing extensive research and the now-widespread doctor-recommended usage across the country. This new policy proposal is a sea change for the federal government.

The next step in rescheduling will come in the form of a proposed rescheduling rule from the DEA. The timing is critical. It has to happen soon for the Biden administration to reap election-year boasting rights – obviously part of the plan here. When the DEA drops the proposed rule, that will be another sign of rescheduling progress, and so it will be another cannabis sector group catalyst.

Will the DEA play along? For clues, let’s turn to voter polling results.

Some recent poll results suggest the Biden administration is likely to press hard for progress on cannabis rescheduling as an election tactic. The two key trends in the polls for cannabis investors are 1) that a vast majority of voters back cannabis reform, and 2) that cannabis reform is an even more salient issue for young voters.

One recent poll found that 57% of Americans who are likely to vote support nationwide cannabis legalization. Not surprisingly, Democrats are more likely to support the change. The poll found that 67% support the reform and 74% under the age of 55 did.

But the poll also found the conservatives are increasingly on board with reform. It found that 55% of Republicans under age 55 favor nationwide cannabis legalization. As for independents, 56% approve of nationwide legalization, and 63% under 55 favor the reform. The survey was conducted by the Tarrance Group.

Another survey concluded that President Joe Biden’s proposed cannabis rescheduling increases support among young voters aged 18-25 by 11 percentage points. This poll was conducted by Lake Research Partners. Voters aged 18-25 have strong opinions on the topic, since we learned that 83% support reform.

The bottom line: Given the way younger voters are defecting to the right, you can imagine the Biden camp may be pushing hard for timely progress on cannabis rescheduling. The poll results suggest a DEA-proposed rule could drop soon, catalyzing the cannabis sector once again.

For more detail on when the DEA catalyst might hit, other catalysts ahead, and how to beat the cannabis sector as I have so far this year, consider subscribing 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.