Cannabis stocks likely to see more rallies, PI Financial says

Fans of the cannabis investment space can expect more good vibes related to federal-level moves on the drug in the United States. That’s the assessment from PI Financial analyst Jason Zandberg, who said in a recent report on the sector that US President Joe Biden’s announcement last week is a big step in the right direction for marijuana reform.

Cannabis stocks both north and south of the border popped last week after the Whitehouse issued a statement from Biden on what he called “our failed approach to marijuana.” President Biden announced a pardon of all prior Federal offences of simple marijuana possession, urging Governors to follow suit at the state level, while also saying he would be asking Health and Human Services (HHS) and the US Attorney General to review cannabis’ current status as a Schedule 1 Controlled Substance. 

“Federal law currently classifies marijuana in Schedule 1 of the Controlled Substances Act, the classification meant for the most dangerous substances,” Biden said. “This is the same schedule as for heroin and LSD, and even higher than the classification of fentanyl and methamphetamine – the drugs that are driving our overdose epidemic.”

The announcement comes  at a time when cannabis companies in the United States continue to operate on a state-by-state basis, with critics pointing to banking restrictions on Schedule 1 drugs as a serious hindrance to the industry’s growth. Cannabis stocks in general have been in a severe drought over the past year-and-a-half and most names having lost well over half of their value over that period.

But Zandberg said there’s now a glimmer of hope for cannabis.

“While [the Biden announcement] is not a silver bullet for the cannabis industry, it is a big step in the right direction. We will likely see more rallies in the cannabis markets as more announcements are made regarding this rescheduling process. The cannabis market as a whole is extremely undervalued and, in our opinion, these events are unlocking some trapped value,” Zandberg wrote in his October 7 report.

The path to rescheduling is not a quick one, as it requires the Drug Enforcement Agency (DEA) to request that HHS review the medical and scientific evidence on marijuana, analyzing the drug based on its pharmacological effects and evidence of its medical utility. Once the HHS makes a recommendation, the DEA then conducts its own review before the final scheduling.

Zandberg argued that a rescheduling of cannabis is likely to see it moved into the Schedule 2 category — which currently includes drugs such as cocaine, methamphetamine, fentanyl and Ritalin — rather than a complete de-scheduling.  On the one hand, de-scheduling would have to involve maintaining that there is no potential for abuse and that’s very unlikely in marijuana’s case, considering its current recreational use. On the other hand, Zandberg said the United States has already been a backer of the United Nations’ move to drop cannabis from its list of “dangerous drugs” and the US has also supported a Schedule 2-equivalent rating for cannabis under the International Narcotics Control Board. 

“While we don’t necessarily agree with that [Schedule 2] classification, we believe the DEA will likely make a small rather than large move,” he wrote.

At the same time, the currently restrictive banking and capital access that exists for US cannabis companies could be positively impacted by Biden’s announcement and an ensuing re-scheduling. Zandberg said while US federal 280e tax implications would still apply if cannabis were to move to a Schedule 2 classification, that move would effectively represent a concession that marijuana has recognized medical uses and thus likely remove the threat of federal prosecution for medical marijuana patients while also providing safe harbour for banks and credit unions dealing with medical marijuana businesses, although the same might not apply to rec cannabis operations, Zandberg said.

As for a timeline for a re-scheduling, Zandberg said it could take a while, pointing to the DEA’s review of hydrocodone in 2013 which moved the drug from Schedule 3 to Schedule 2. That process happened in one year, although Zandberg said the comparison might not be apt, as at the time the US was dealing with a national emergency of overdoses in connection with opioids such as hydrocodone.

“Biden has asked for Step 1 to begin, but there is still a long journey ahead,” Zandberg wrote. “We believe any rational review would lead to a rescheduling of cannabis. How long this will take is anybody’s guess, but given the alternative (waiting for Congress to enact legislation) this review process is likely to be the more expedient action in our opinion.”