Cannabis Stocks Soar 28-38% on Reform, DEA Reclass Hopes

Key Takeaway

• Cannabis stocks and ETFs, like Advisorshares Pure US Cannabis ETF and Roundhill WEED, outperform S&P 500 amid reform hopes.
• DEA's potential reclassification of cannabis could significantly reduce taxes for companies, boosting the industry.
• Despite current legislative hurdles, optimism remains high for future federal cannabis reform and banking act progress.

Cannabis Stocks Surge Ahead of Policy Hopes

Investors have been increasingly attracted to the cannabis sector, betting on the potential for significant gains tied to US policy changes. Despite a lack of substantial regulatory reform, cannabis stocks and funds have outperformed the broader market since October. The Advisorshares Pure US Cannabis ETF and the Roundhill Cannabis ETF have seen remarkable gains of 28% and 38%, respectively, outpacing the S&P 500's 16% increase over the last six months. The MJ Pureplay Index, tracking 100 global cannabis industry stocks, also rose by 25% in the same period. Dan Ahrens of Advisorshares Investments LLC noted, "This past year, shareholders have been very sticky," highlighting investors' belief in impending federal reform.

Anticipation Builds for DEA Reclassification

The cannabis market is abuzz with anticipation that the US Drug Enforcement Administration (DEA) will reclassify cannabis as a controlled substance with recognized medical benefits, a significant shift from its current classification alongside LSD and heroin. This potential reclassification, spurred by the Biden administration's nudging, could alleviate additional taxes on cannabis companies and foster further legislative action, such as the Secure and Fair Enforcement Regulation (SAFER) Banking Act. Ross Gerber, president of Gerber Kawasaki Inc, expressed optimism, stating, "I think cannabis stocks could rally 100% with this rescheduling and the momentum that would come with further legislation."

Legislative Efforts and Market Optimism

Despite the uncertainty surrounding the timing of the DEA's decision and the passage of the SAFER Banking Act, the cannabis industry remains hopeful. The Act, which aims to enable banks and credit unions to work with legal cannabis businesses, has been prioritized by Senate Majority Leader Chuck Schumer (D-NY). Additionally, a bill introduced by Sen. Jacky Rosen (D-NV) seeks to create federal incentives for the expungement of low-level marijuana offenses, further fueling optimism for comprehensive cannabis reform. The growing popularity of cannabis, with 24 states, two territories, and Washington DC legalizing recreational use, underscores the sector's potential for dramatic growth.

Street Views

• Dan Ahrens, Advisorshares Investments LLC (Bullish on the cannabis industry):

  "This past year, shareholders have been very sticky. People have stuck with it even through bad times because they believe that federal reform is finally going to come."

• Ross Gerber, Gerber Kawasaki Inc (Bullish on cannabis stocks):

  "I think cannabis stocks could rally 100% with this rescheduling and the momentum that would come with further legislation... No cannabis company that exists today would be here if they weren’t highly efficient."

• Jaret Seiberg, TD Cowen (Cautiously Optimistic on the SAFE Banking Act):

  "We do see a path for SAFE, though it would require keeping the bill narrow. That would allow the bill to be framed as a public safety measure designed to reduce crime around cannabis stores that today do business mostly in cash."