Cannabis stocks will rebound on path to rescheduling, analysts say

Cannabis stock prices, which have taken a beating in recent years, get a boost whenever there’s a major announcement pertaining to federal marijuana reform.

For example, the AdvisorShares Pure US Cannabis ETF (MSOS), which tracks publicly held cannabis companies in the United States, jumped by roughly 26% within minutes of an April 30 report that the U.S. Drug Enforcement Administration intended to reclassify marijuana from Schedule 1 to Schedule 3 under the Controlled Substances Act.

The increase was more modest on Thursday after U.S. Attorney General Merrick Garland submitted a notice of proposed rulemaking to move marijuana to Schedule 3.

The AdvisorShares Pure US Cannabis ETF rose only 1.77% and closed at $9.76.

“In the future, it continually will rise, but with some volatility for sure,” said Mackenzie Peterson, the vice president of marketing at Maryland-based AdvisorShares, told MJBizDaily.

“It’s a super small space, so a little bit of money can really move things around.

“Don’t expect that to go away just yet, until the institutional money kind of comes in and things get much more normalized from an investment perspective.”

Data from financial services firm Morningstar show trailing returns on AdvisorShares ETFs on Oct. 6, when Biden ordered a review of marijuana scheduling; Aug. 30, when the Department of Health and Human Services recommended that the DEA reschedule marijuana; and April 30, when the news broke that the DEA had signed off on rescheduling.

‘Race has not been won yet’

While Morgan Paxhia, the managing director of California-based Poseidon Investment Management, called Thursday’s news “historic,” he noted that institutional investors and strategic investments from Big Alcohol and consumer packaged goods companies will wait until the process is complete.

“The finish line is on the horizon, but the race has not been won yet,” Paxhia said in a statement.

Jesse Redmond, a managing director at Florida-based Water Tower Research, concurred, adding that marijuana reform is a key piece of President Joe Biden’s reelection campaign.

“This is an important next step in what we believe is a coordinated Democratic effort to advance cannabis reform ahead of the elections to mobilize and sway younger voters,” Redmond told MJBizDaily via email.

“Regarding price action, we anticipate incremental multiple expansion as we hit key milestones on the way to the final ruling.”

Canadian cannabis stocks rally

Some Canadian cannabis stock prices also got a boost from Thursday’s announcement.

Shares of Ontario-based Canopy Growth Corp. (WEED) on the Toronto Stock Exchange rose more than 11%, closing at $14.97.

“In addition to setting an important precedent and paving the way for additional reform including full legalization, rescheduling is especially significant as it provides an immediate and significant improvement to the cashflow of all state-legal cannabis businesses including those within Canopy USA,” CEO David Klein said in a statement.

Klein was referencing Canopy USA, the Canadian operator’s U.S.-domiciled holding company.

Earlier this month, Canopy USA exercised its options to acquire Jetty Extracts, a California-based extraction brand and vape technology company, and Wana Brands, a Colorado-headquartered edibles manufacturer.

Debt financing on the rebound?

Frank Colombo, managing director at New York-based Viridian Capital Advisors, noted during MJBizDaily’s LinkedIn Live this week that the debt capital markets have thawed slightly.

“This week, we have $83 million worth of new debt issues,” he said.

“The debt capital markets are reopening on the promise of rescheduling and maybe just on the promise of the fact that the companies are keeping the tax money; they’re not paying it,” Colombo added, referring to a new strategy some multistate operators are employing to reduce their tax burdens under Section 280E of the Internal Revenue Code.

A reclassification of marijuana to Schedule 3 would relieve operators of the punitive 280E.

“We work with hundreds of licensed cannabis businesses, and the ability to deduct ordinary operating costs under the Schedule 3 proposal would be a game-changer for them,” Brian Vicente, founder of Colorado-based law firm Vicente, said in a statement.

“This proposal will release cannabis businesses from the crippling tax burden they are currently shackled with and allow these businesses to grow and prosper.”

Kate Robertson can be reached at kate.robertson@mjbizdaily.com.