Leaving 2023 the cannabis industry was high on hope that cannabis would get rescheduled in 2024. Some were suggesting it could be sometime in the summer of 2024 if the average chain of events occurred. What sparked the positive thoughts was a recommendation in August 2023 from the Department of Health and Human Services that the Drug Enforcement Administration (DEA) reschedule cannabis from a Class one drug to a class three drug.
While some in the industry preferred a complete de-scheduling, a drop to number three was still a welcome change. It would alleviate the dreaded 280E problem and potentially open up interstate commerce. There was also the potential of an easing from the U.S. stock exchanges and a better level of comfort from the major banks. All of those good feelings were transferred to stock valuations which had been mired in a two-year bear market. Cannabis stocks have fallen as much as 90% over the past two years, but after that announcement, they popped in September and then sold off as some holders jumped ship.
However, in November, stocks started to slowly climb back and even began 2024 on an upside. Jesse Redmond of Water Tower Research wrote in his weekly report, “It was a strong start of the year for cannabis stocks, with the US cannabis MSOS ETF gaining 13.12% and the global YOLO ETF increasing 9.11%. US cannabis continues to outperform Canadian and other global names due to the positive sentiment driven by the potential for the DEA to agree with the HHS’s Schedule III recommendation. This would eradicate 280E, the onerous tax code that applies to plant-touching US operators.”
Pable Zuanic of Zuanic & Associates remains positive about the possibility of rescheduling. He recently wrote in a report initiating coverage of Gold Flora, “Rescheduling is part of the President’s reelection platform, and we expect positive headlines coming out of the DEA in late 2Q24. In fact, we assign 90% probability to such a scenario. But the devil will be in the details: the DEA reply may go from only a positive response but with no implementation framework (or timeline) before the election, to a full-blown framework enacted by the DOJ in the summer (setting the FDA role; phasing out 280e for rec and med; even including safe harbor language for the US exchanges to uplist plant touching cannabis companies). We think the former is more likely (leaving a lot up in the air), but even in that scenario cannabis stocks would rally.”
Roth Capital is also feeling optimistic writing, “2024 is shaping up as a momentous year ahead of federal regulatory catalysts, with likely rescheduling in the near term. U.S. cannabis remains a compelling value on fundamentals w significant upside on federal regulations.”
Pump The Brakes
Yet, it seems other cannabis analysts are starting to temper those expectations. The Advisors Shares cannabis ETF MSOS fell from a high of 8.12 on January 5 and closed at 7.11 on January 10. Green Market Report wrote about Viridian Capital’s Top Five Stocks and in that report, the analysts stressed that they weren’t basing their opinions on a hoped-for rescheduling.
Viridian report stated, “Viridian believes that a move to schedule 3 with the benefit of eliminating 280e is likely. However, we are less inclined to think that the President will somehow push this through in time for the election. The DEA’s process includes public comment periods and opportunities for challenges to its proposed rule-making. The timing to run this gauntlet is unclear but likely longer than the market wants to believe.”
The de-scheduling buzz got harshed last week when the DEA made sure to flex its muscles and remind everyone that the move was its call and its call alone. The announcement was made in light of some members of Congress asking the DEA for an update on the recommendation from HHS. The DEA reminded Congress to stay in its lane. While the DEA was getting pushed by some Congress people to move quickly, a group of former U.S. attorneys wanted to DEA to keep cannabis as a Schedule One drug – making this move no slam dunk.
Ultimately, no one seems to know when or even if the DEA will follow the recommendation. Typically they do, but as everyone in cannabis knows, things never go according to plan in this industry. The stocks are hanging on each thread of news and selling at each move higher for now.