Cannabis Stocks Tumble as DEA Sets December Hearing on Marijuana Reclassification

The announcement by the Drug Enforcement Administration (DEA) to hold a hearing on December 2, 2024, to consider reclassifying marijuana as a Schedule III drug has led to significant declines in cannabis stocks. This report analyzes the affected stocks, evaluates expert opinions, and explores the broader implications for the cannabis industry and its stakeholders.

Introduction

Market Reaction and Affected Stocks

The announcement of the DEA hearing led to sharp declines in cannabis stocks. Notable declines included:

• Canopy Growth Corp. (CGC): Down approximately 9.5%
• Tilray Brands (TLRY): Falling nearly 6%
• Aurora Cannabis (ACB): Slipping about 5%
• AdvisorShares Pure U.S. Cannabis ETF (MSOS): Tumbling around 13%

Other significant declines were observed in:

• Curaleaf Holdings (OTC: CURLF): Fell by 15.68% to $2.71
• Trulieve Cannabis (OTC: TCNNF): Declined 10.36%, closing at $8.60
• Green Thumb Industries (OTC: GTBIF): Dropped 10.15% to $9.56
• Cresco Labs (OTC: CRLBF): Decreased 13.89% to $1.55
• Cansortium (OTC: CNTMF): Experienced the largest drop of 16.67%, closing at $0.125

Analysts’ Opinions and Views

Analysts have expressed mixed opinions regarding the DEA’s announcement and its implications for the cannabis market.

1. Aaron Grey, Alliance Global Partners: Grey noted that the timing of the DEA’s hearing “puts greater election risk” around the potential reclassification. The uncertainty surrounding the election outcome adds a layer of risk to the market.
2. Pablo Zuanic, Zuanic & Associates: Zuanic indicated that while the delay was somewhat anticipated, it creates uncertainty. He believes that the announcement of an Administrative Law Judge (ALJ) hearing scheduled for December 2, 2024, will add credibility to the process. Zuanic suggests that if the MSOS ETF experiences a further decline of 15-20%, this could present a buying opportunity, especially if Kamala Harris were to win the election.
3. TD Cowen Washington Research Group: The group noted that the final decision on rescheduling is likely to be left to the winner of the election, with more confidence in Kamala Harris favoring rescheduling than Donald Trump. The DEA is required to analyze testimony from the hearing before acting on rescheduling, which could take three months or longer, potentially pushing the timeline into late spring or summer 2025.
4. Industry Leaders: Leaders in the cannabis industry have expressed disappointment over the delay, emphasizing that the lack of rescheduling prolongs the challenges faced by businesses, patients, and advocates relying on cannabis. Bryan Barash, Vice President of Dutchie, mentioned that the coalition advocating for cannabis rescheduling is prepared to participate in the hearing and expects a fair process. Brian Vicente, a cannabis attorney, expressed confidence that the evidence would support moving cannabis to Schedule III.

Underlying Trends and Market Forces

The cannabis market is highly sensitive to regulatory changes, and the DEA’s announcement has exacerbated existing volatility. Several underlying trends and market forces are at play:

1. Regulatory Uncertainty: The delay in the DEA’s decision has created uncertainty in key regulatory areas such as banking, taxation, and interstate commerce. This uncertainty may deter investors from committing capital to the sector, potentially slowing growth and innovation.
2. Political Landscape: The timing of the hearing after the presidential election introduces political risk. The differing views of candidates Kamala Harris and Donald Trump on marijuana legalization add to the uncertainty. Harris has advocated for rescheduling, while Trump’s stance has been less definitive.
3. Market Volatility: Historical data shows that cannabis stocks are highly volatile in response to regulatory news. For example, in April 2024, cannabis stocks surged following discussions of potential regulatory shifts. The current declines reflect the market’s sensitivity to regulatory announcements.
4. Potential Benefits of Rescheduling: Reclassifying marijuana as a Schedule III drug could remove certain research barriers and allow state-licensed cannabis businesses to access federal tax deductions under IRS code 280E. However, rescheduling would not federally legalize marijuana, meaning that companies could still face criminal prohibitions under the Controlled Substances Act (CSA).

Implications for Stakeholders

The DEA’s announcement has several implications for different stakeholders:

1. Investors: The immediate market reaction has been negative, but analysts see potential buying opportunities if the political environment shifts favorably. Investors should monitor stock volatility and political outcomes in the upcoming election.
2. Cannabis Companies: The delay in rescheduling prolongs the challenges faced by cannabis businesses, including limited access to banking services and federal tax deductions. Companies must navigate this uncertainty while preparing for potential regulatory changes.
3. Patients and Advocates: The delay in rescheduling affects patients who rely on cannabis for medical purposes. Advocates continue to push for regulatory changes that would improve access and reduce legal barriers.
4. Regulators and Policymakers: The DEA’s decision to delay the hearing reflects the complex regulatory landscape surrounding cannabis. Policymakers must balance the potential benefits of rescheduling with concerns about public health and safety.

Actionable Insights and Recommendations

Based on the analysis, the following actionable insights and recommendations are proposed:

1. Monitor Political Developments: Investors and cannabis companies should closely monitor the political landscape leading up to the 2024 presidential election. The outcome of the election will significantly impact the likelihood of rescheduling and subsequent regulatory changes.
2. Prepare for Volatility: Given the historical volatility of cannabis stocks in response to regulatory news, stakeholders should be prepared for continued market fluctuations. Investors may consider adopting a long-term investment strategy to navigate short-term volatility.
3. Advocate for Regulatory Clarity: Industry leaders and advocates should continue to push for regulatory clarity in key areas such as banking, taxation, and interstate commerce. Engaging with policymakers and participating in the DEA hearing can help shape the future regulatory landscape.
4. Evaluate Buying Opportunities: Analysts suggest that further declines in cannabis stocks could present buying opportunities, particularly if the political environment shifts favorably. Investors should conduct thorough due diligence and consider the potential risks and rewards.
5. Diversify Investments: To mitigate risk, investors may consider diversifying their portfolios to include a mix of cannabis stocks and other sectors. This approach can help balance potential gains with the inherent volatility of the cannabis market.

Conclusion

The DEA’s announcement to hold a hearing on December 2, 2024, to consider reclassifying marijuana as a Schedule III drug has led to significant declines in cannabis stocks. The delay introduces regulatory and political uncertainty, impacting investors, cannabis companies, patients, and advocates. While the immediate market reaction has been negative, analysts see potential for recovery if the political environment shifts favorably. Stakeholders should monitor political developments, prepare for continued volatility, advocate for regulatory clarity, evaluate buying opportunities, and consider diversifying investments. The future of the cannabis market will depend on the outcome of the 2024 presidential election and subsequent regulatory actions.