Pot Stocks Bloom as DEA Proposes Marijuana Reclassification

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Did Tilray Brands (NASDAQ:TLRY) have a blockbuster earnings report? Did Aurora Cannabis (NASDAQ:ACB) suddenly launch a new edibles brand? The answer is none of the above, as it was a public-sector catalyst that prompted an epic buying spree in cannabis stocks on Tuesday.

It certainly wasn’t company-specific. At midday on April 30, Tilray stock had soared 38% on the day while Aurora stock had surged 39%. Meanwhile, Canopy Growth Corp. (NASDAQ:CGC) stock skyrocketed a jaw-dropping 54%.

This all took place while the Nasdaq (NDX) and bitcoin (BTC-USD) were both down 1%. Thus, a rising tide evidently lifted all cannabis boats on this unusual final day of April, and informed investors surely want to know why — and how they might get involved as the screen turns green.

Big jump on Biden bump

The aforementioned pot stocks all jumped at the same time, at around 1:10 p.m. Eastern on Tuesday. Prior to that, cannabis stocks were going nowhere fast.

When I say “nowhere fast,” I mean this in the short term but also over the past several years. Take Canopy Growth stock as an example. Even after soaring 50%+ in a single day, CGC stock still traded 90%+ below its early-2021 peak.

A similar tale could be told for Aurora stock and Tilray stock. Cannabis stocks are decidedly risk-on assets, and with the implementation of quantitative tightening (QT) in 2022 and 2023, some investors rotated out of the riskiest of risk-on assets.

Additionally, the marijuana-stock hype cycle of 2017 and 2018 gave way to a general feeling of disappointment. The dream of vast revenue from so-called Cannabis 2.0 (i.e., sales of auxiliary cannabis products such as vapes and edibles) just didn’t work out as some investors had hoped it would.

The pot-stock fervor peaked six years ago, and the U.S. federal government still hasn’t decriminalized marijuana. Back then, it seemed as if federal legalization was right around the corner as multiple U.S. states had enacted pro-cannabis legislation.

However, it’s basically been year after year with zero progress at the federal level since then. This is the main reason why cannabis stocks are so badly beaten down, but 2024 has finally brought the next chapter of the story. The Associated Press (AP) broke a bombshell story on Tuesday afternoon that’s bound to send ripple effects throughout the canna-business universe.

According to the AP, the U.S. Drug Enforcement Administration (DEA) under President Joe Biden “will move to reclassify marijuana as a less dangerous drug.” If passed to become the law of the land, this reclassification “would recognize the medical uses of cannabis and acknowledge it has less potential for abuse than some of the nation’s most dangerous drugs.”

Study before you celebrate

As you might imagine, social-media commentators went into “light ’em up” mode as pot stocks exploded on Tuesday:

Before you jump headfirst into the long side of the cannabis-stock trade though, it’s important to know the full story. As always, it’s not enough to just read the headlines and hit the “buy” button.

First of all, the DEA’s proposal isn’t currently the law. The White House Office of Management and Budget (OMB) still has to review the proposal. Yet, it seems quite likely that the OMB under President Biden would approve the DEA’s reclassification proposal for marijuana without much resistance.

Here’s a detail that investors really need to pay attention to. As the AP points out, the DEA’s proposal “would not legalize marijuana outright for recreational use.” Thus, it would be ill-advised to just step outside and light up a joint if you’re in a U.S. state where marijuana use is still prohibited.

If the proposal is approved by the OMB and officially signed into law, it would reclassify cannabis in the U.S. as a Schedule III drug. As a result, in comparison to certain other drugs, cannabis would be considered a less potentially dangerous drug on the same level as “ketamine and some anabolic steroids,” the AP explained.

Currently, marijuana is a Schedule I drug, so it’s classified among the highest-risk drugs — on the same level as heroin and LSD. Hence, a move from Schedule I to Schedule III would be a game changer even if it wouldn’t signify all-out legalization.

It’s also worth noting that the DEA didn’t respond to the AP’s “repeated requests for comment.” Therefore, there’s a risk that this could turn into a “buy the rumor, sell the news” type of scenario.

In other words, buying cannabis stocks now is a high-risk, potentially high-reward proposition. This is usually the case with pot stocks, but the stakes are heightened now. Consequently, risk-averse investors should probably stay out of the trade while adventurous souls might maintain a small marijuana-stock position at most.