Pot stocks surge on report DEA set to reclassify marijuana

Pot stocks surge on report DEA set to reclassify marijuana

Shares of cannabis-related companies jumped Tuesday after the U.S. Drug Enforcement Administration moved to reclassify marijuana to a less dangerous drug category in what would be a historic shift for the industry.

Tilray Brands Inc. jumped 40 per cent, while Canopy Growth Corp. gained 79 per cent. The MJ PurePlay 100 Index, which tracks the industry globally, rose 22 per cent, the most since October 2022. Meanwhile, the AdvisorShares Pure U.S. Cannabis ETF surged 25 per cent and was halted for volatility in intraday vtrading.

Investors have been long awaiting DEA action on the reclassification of marijuana, which has been grouped with drugs such as LSD and heroin. Moving the substance to a different group would remove additional taxes that cannabis companies have to pay — a major overhang for the industry. The agency has been reviewing the classification for marijuana since September after a nudge from the Biden administration.

“There’s been a lot of rumors coming out in the last few days but this looks official,” said Dan Ahrens, managing director of Advisorshares Investments LLC, adding that this move from the DEA could start a domino effect. “I think it makes it easier for the House and Senate to act on SAFER Banking.”

The SAFER Banking Act would make banking and financial services more accessible for the industry.

Cannabis industry stocks have risen this year and even outperformed the S&P 500 Index as investors bought back into the beaten down names in anticipation of the DEA action. Still, pot stocks are trading at steep discounts to the highs hit a few years ago at the start of the cannabis boom. 

In addition to removing extra taxes cannabis companies have to pay and therefore boosting cash flow, changing the classification could also help bring institutional investment to the industry, Jefferies analyst Owen Bennett wrote in a Tuesday note.

“The major reason current multiples are depressed is lack of institutional ownership,” Bennett wrote, adding that this is due to a combination of factors including major exchanges not listing cannabis stocks.

Reclassification could also prompt more states in the U.S. to legalize marijuana, help destigmatize use and make it easier for the substance to be studied, according to the Jefferies note.

The move “would hugely improve the prospects of full federal legalization within the next 5 years, with a critical piece of this move making it easier to study cannabis and thereby fill in the data gaps where there may be concerns around its widespread use among the population,” said Bennett.

Of course, it’s not clear when the final word on the change could come from the DEA. In his note, Bennett said a rule could be published this week, while Needham analyst Matthew McGinley expects a scheduling announcement in the coming months, he wrote in a note.

“If enacted, rescheduling would be a significant federal reform and the most substantial incremental policy change regarding cannabis at the federal level in a century,” said McGinley.

Carmen ReinickeBloomberg News