DEA's move boosts one subset of Canadian stocks, signalling an industry shift
Shares of cannabis-related companies experienced a significant rise on Tuesday following the announcement by the US Drug Enforcement Administration (DEA) that it plans to reclassify marijuana to a less dangerous drug category.
This move, which marks a historic shift for the industry, was reported by BNN Bloomberg.
Tilray Brands Inc. saw an increase of 40 percent in its stock value, while Canopy Growth Corp. soared by 79 percent.
Additionally, the MJ PurePlay100 Index, which globally tracks the cannabis industry, climbed by 22 percent, representing its largest gain since October 2022. The AdvisorShares Pure US Cannabis ETF also surged by 25 percent and faced a trading halt due to volatility during the day.
This awaited action by the DEA on the reclassification of marijuana, which has traditionally been grouped with more severe drugs like LSD and heroin, is set to alleviate some financial burdens.
Specifically, it would eliminate extra taxes that cannabis companies are currently required to pay, addressing a significant concern within the industry. The DEA began reviewing marijuana’s classification in September following a prompt from the Biden administration.
Dan Ahrens, managing director of Advisorshares Investments LLC, commented on the situation, noting, “There’s been a lot of rumors coming out in the last few days, but this looks official.”
He suggested that this DEA move could trigger further legislative actions, potentially easing the passage of the SAFER Banking Act, which aims to make banking and financial services more accessible to the cannabis industry.
Furthermore, cannabis stocks have not only risen this year but have also outperformed the S&P 500 Index.
This uptick comes as investors reengage with the sector in anticipation of the DEA's reclassification, despite the stocks still trading at significant discounts compared to their peak a few years ago at the onset of the cannabis boom.
Analysts see the reclassification as a potential catalyst for broader changes. Owen Bennett, an analyst from Jefferies, stated that reclassification could boost the industry's cash flow by removing additional taxes and might attract institutional investment.
Bennett highlighted that “the major reason current multiples are depressed is lack of institutional ownership,” primarily because major exchanges do not list cannabis stocks.
Moreover, the reclassification could further encourage US states to legalize marijuana, reduce stigma around its use, and facilitate research into its effects, as per the Jefferies note.
Matthew McGinley, an analyst from Needham, indicated that a formal scheduling announcement might be expected in the coming months, emphasizing the significance of this reform as “the most substantial incremental policy change regarding cannabis at the federal level in a century.”
