Will These Cannabis Stocks Pop on Federal Reform?

Cannabis may be legal in some form in many US states, but the Drug Enforcement Agency (DEA) currently considers it to be on a par with much harder substances. Lowering cannabis’ classification will be critical for future growth in the US market, as will banking reform.

• The US health department has advised the DEA to lower cannabis’ classification.
• There is hope that US lawmakers could advance the SAFE Banking Act in the coming weeks.
• How to invest in the cannabis ecosystem: the AdvisorShares Pure US Cannabis ETF is up 34% in the past six months.

Federal support for cannabis in the US appears to be edging ever closer. On 31 August, the US health department called on the DEA to loosen laws against the drug.

Cannabis is currently a Schedule I controlled substance, which puts it in the same category as heroin and LSD, and implies that it has “no currently accepted medical use and a high potential for abuse”, as per the DEA’s classification.

The US health department would like to see cannabis downgraded to a Schedule III substance — that is, one “with a moderate to low potential for physical and psychological dependence”. Other drugs in this class include ketamine and testosterone.

“We believe that rescheduling to Schedule III would mark the most significant federal cannabis reform in modern history,” Edward Conklin, Executive Director of the US Cannabis Council, a non-profit that advocates for the industry, said in a statement.

It remains to be seen whether the DEA will indeed reschedule cannabis. However, as Roth MKM analyst Scott Fortune pointed out in a note to clients seen by CNBC: “Historically, the DEA has never gone against a scheduling recommendation” from the health department.

According to the Opto screener, the cannabis theme, which includes Aurora Cannabis [ACB.TO], Canopy Growth [WEED.TO] and Cronos Group [CRON.TO], has gained 12.5% in the past week and 36.7% in the past month.

Rescheduling Would Eliminate Tax Burden

Last month’s news has been welcomed by the industry, which had become frustrated with a lack of progress on the legalisation front.

Rescheduling would eliminate the 280E tax penalty currently imposed on Schedule I and II substances, which prevents businesses from writing off business expenses. This means cannabis companies, which often run on razor-thin margins, have to pay significantly more tax than the corporate rate of 21%.

The removal of 280E would have a “phenomenal impact on the industry to be able to take those funds and reinvest into jobs, construction projects, more research and product development,” Curaleaf [CURLF] CEO Matt Darin told the Washington Post.

Green Thumb Industries [GTBIF] is capitalising on the news with a $50m buyback programme. Though it was already “in the works”, after the “move in the sector based on news from Washington, DC, we want the ability to take advantage for shareholders should the opportunity arise”, announced Green Thumb CEO Ben Kovler in a press release on 5 September.

The cannabis theme got an extra dose of good news on 1 September. White House press secretary Karine Jean-Pierre confirmed at a press conference that President Biden has always “supported the legalisation of marijuana for medical purposes”.

Senate Hopes to Push Forward with Banking Reform

The lifting of 280E would give the cannabis industry the chance to capture write-offs that are already open to other industries. What’s more, the long-awaited Secure and Fair Enforcement (SAFE) Banking Act should open up more capital streams for cannabis companies, giving them the platform to grow their top and bottom lines.

The legislation would prevent banks from being fined or facing federal prosecution for offering services to legal cannabis companies. Currently, many weed shops are forced to deal in cash, while ‘cashless ATMs’, which disguise transactions as ATM withdrawals, have also been a popular workaround.

The Senate majority leader, Democrat Chuck Schumer, wants to make the SAFE Banking Act a priority over other bills, and is hopeful that the legislation advances by mid-October.

However, passing the SAFE Banking Act will require bipartisan buy-in. The bill currently has 42 co-sponsors — almost half of the Senate, including eight Republicans and three independents, according to cannabis publication Marijuana Moment. Insiders believe that the bill should have enough Republican support to meet the 60-vote threshold required for it to be passed through the Senate, reported the publication.

Germany Closer to Recreational Legalisation

Over in Europe, Germany has moved one step closer to becoming just the second EU country to legalise cannabis for recreational use — the other is Malta, which legalised it in December 2021.

In August the German cabinet approved plans to legalise cannabis. These would allow individuals to carry 25g on their person, grow up to three plants at home, and acquire the drug at licensed clubs.

Though the German parliament still has to pass the bill into law, health minister Karl Lauterbach has described the cabinet’s approval as a “turning point”. Last May, having already anticipated that parliament would pass the legislation, Global X forecast the country’s cannabis market would generate $3bn in sales by 2026.

Other EU countries may be persuaded to follow suit.

Further Legislation Could Spur M&A Activity

According to Arelis Agosto, Senior Healthcare Analyst at Global X, both the US SAFE Banking Act and potential legalisation in Germany should bolster broader support for the cannabis industry. As more and more countries move to legalise the substance, Agosto predicts there will be “an uptick in M&A activity”, with companies looking to pool their resources in a bid to capitalise on opportunities.

“But, in the meantime, companies are likely to remain focused on driving operational efficiencies and accelerating their paths to profitability,” concluded Agosto.

How to Invest in Cannabis

ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.

Funds in Focus: the AdvisorShares Pure US Cannabis ETF

The Amplify Seymour Cannabis ETF [CNBS] has allocated 37% of its portfolio to multi-state operators (MSOs) and 27% to cultivation and retail as of 30 June. Pharmaceuticals and biotechnology have a 10% weighting, while agricultural technology, hemp products, finance and real estate all have single-digit allocations. The fund is down 23.7% in the past year, but up 20.1% in the past six months.

The Global X Cannabis ETF [POTX] has allocated 50.4% of its portfolio to healthcare, 23.5% to consumer staples and 16.6% to real estate. Communication services and financials account for 5.5% and 4% respectively as of 31 August. The fund is down 47.1% in the past year and down 9.2% in the past six months.

The AdvisorShares Pure US Cannabis ETF [MSOS] is effectively a pure-play on MSOs, with REITs, financials and supporting services accounting for 0.4% of the portfolio combined. The fund is down 23.7% in the past year, but up 34% in the past six months.