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The Next Big Cannabis Sector Catalyst Has Finally Arrived

A much-anticipated catalyst has finally arrived for the cannabis sector and it’s upended what had been more than two years of major underperformance.

Cannabis Plants

Cannabis stocks, as measured by the New Cannabis Ventures Global Cannabis Stock Index, are higher by roughly 40% since late August. I’ve been bullish all year, and my cannabis portfolio now outperforms the New Cannabis Ventures Global Cannabis Stock Index by around eleven percentage points.

Cannabis names largely owe their strength to two recent but significant catalysts.

  1. Last month the Food and Drug Administration (FDA) and its parent agency Health and Human Services (HHS) recommended “rescheduling” under the Controlled Substances Act of 1971. HHS and the FDA now say cannabis should be moved to Schedule III from Schedule I.

This is big news because it would liberate cannabis companies from onerous federal taxes. The proposed change would release them from part of the Internal Revenue Service code known as “280E” which bars cannabis companies from deducting most expenses against federal taxes.

It’s estimated that the industry paid $1.8 billion in excess taxes (as compared to other industries) in 2022 due to the effects of 280E, with 2023’s figures likely to exceed $2 billion. Kim Rivers, the CEO of Trulieve (TCNNF) considers the news a “game changer.”

  1. In mid-September, we learned that the Senate Banking Committee had scheduled a vote on key cannabis banking reform for September 27, which potentially paves the way for legislation expanding banking access for cannabis companies (SAFE Banking).

There is, of course, no guarantee that the committee will stick to the schedule, especially as threats of a potential government shutdown loom, but this is the most meaningful progress on SAFE Banking since 2022.

Another consideration is that the HHS Schedule III recommendation signals the administration of President Joe Biden really is serious about further cannabis law reform. This will speed up progress on other bullish reforms – including changes at the state level. Here’s the outlook for the timing on progress on rescheduling.

Rescheduling Timing

HHS and the FDA made the rescheduling recommendation to the Drug Enforcement Agency (DEA). The next move will be a DEA response, in the form of a proposed rule. We should see that by year’s end, says Howard Sklamberg, a federal drug law expert who is a partner at Arnold & Porter. He chaired the FDA’s Marijuana Working Group for several years.

But we already know the letter marks an historical event. “It is the first time we have an FDA finding that confirms there is, in fact, an accepted medical use and low potential for psychological dependence,” says Rivers, the CEO at Trulieve. “This is a real watershed moment for cannabis.”

After the DEA offers a proposed rule, it will see public comment and administrative law judge hearings. Then comes a DEA recommendation to the attorney general, and finalization by the administration.

Sklamberg, at Arnold & Porter, expects all of that to happen by the middle of 2024. That would be lightning speed for a process that can take as much as nine years. But he reasons the administration wants to nail down the change before the mad rush to finalize laws that typically happens at the end of the last year of an administration.

Charlie Bachtell, the founder and CEO of Cresco Labs (CRLBF), thinks the whole process could wrap up in the first half of 2024. His company, Cresco, is among the top spenders on federal lobbying. So, he is wired in.

For my take on six other potential catalysts from here, and their timing, and the best stocks and exchange-traded funds to own, 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.