Potential Cannabis Reclassification Has Investors Bullish

U.S.-listed cannabis stocks and ETFs rallied this week with Vice President Kamala Harris calling on the Drug Enforcement Administration to reach a decision on the reclassification of cannabis as soon as possible. Speaking at a roundtable event at the White House, VP Harris claimed that it is unfair to categorize marijuana as dangerous as heroin (an analogy made because the federal legal consequences of the two drugs are currently equal) given that recent research proves otherwise. Improving the investor sentiment further, Doug Kass, a noteworthy fund manager who runs Seabreeze Capital Partners, posted on X that his firm has learned that the DEA will approve a rescheduling of cannabis to Schedule III shortly. Cannabis stocks rallied fueled by these new developments, which does not come as a surprise given that regulatory challenges have limited the growth of this sector in recent years. 

What The Government Is Saying

A schedule II or III reclassification for cannabis will open the doors for cannabis operators to easily access the financial system including banking facilities, potentially creating new opportunities to grow. A reclassification could also pave the way for full legalization of cannabis in the U.S. – both for medical and recreational purposes. The Department of Health and Human Services has been pushing the DEA to ease restrictions on cannabis for years now and empirical evidence reveals that the DEA has never tossed away a request by the HHS. The DEA, however, has clarified that a decision to reclassify cannabis will be based on the potential medical usage of cannabis, the potential for abuse, and the health concerns that may arise as a result of using cannabis for recreational purposes.

Struggling Cannabis Industry Seeing Recent Gains

Cannabis stocks have delivered lackluster returns since 2021 due to regulatory challenges faced by the industry and the waning initial enthusiasm in the market. After hitting a high of over $55 in February 2021, AdvisorShares Pure U.S. Cannabis ETF (MSOS) is now trading at less than $9, highlighting the rough patch for the cannabis sector. Tables have turned since the VP’s comments last week with the ETF up more than 16% since then. Other cannabis ETFs including Roundhill Cannabis ETF (WEED) and Subversive Cannabis ETF (LGLZ) have also followed a similar trajectory following the favorable developments last week. Because of the substantial uncertainty associated with independent cannabis operators in the U.S., investors are showing a preference for gaining exposure to the cannabis sector through collective investment schemes such as ETFs that help reduce concentration risk.

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