Cannabis stocks have been spiking higher over the past few weeks amid reports that the US government is moving to reclassify marijuana to a much lower risk category under the Controlled Substances Act. Bloomberg reported that the US Department of Health and Human Services had sent a letter to the US Drug Enforcement Administration recommending that cannabis be reclassified from a Schedule I to a Schedule III drug.
In other words, it would no longer be lumped in with heroine and LSD, but would instead by classified with certain forms of Tylenol and cough syrup (with low codeine), steroids or testosterone. This makes sense as cannabis does have medicinal properties and is nowhere near as destructive or addictive as something like heroine.
At the same time, Senate Majority Leader Chuck Schumer is encouraging fellow Senators to work together on passing legislation that will allow cannabis businesses to work with US financial companies, according to a recent “Dear Colleague” letter. Schumer wrote that “safeguarding cannabis banking” — a clear reference to the SAFE Banking Act — is an issue that should be dealt with before the end of the year.
Another report stated that he wants to advance the SAFE Banking Act within the next six weeks. And then Senate Banking Chair Sherrod Brown (D-OH) said Wednesday that lawmakers are closing in on bipartisan agreement to move ahead with cannabis banking legislation. He said the deal is ‘imminent.’
Then today, September 15th, a report was released that the Senate Banking, Housing, and Urban Affairs Committee will mark up the SAFE Banking Act the week of Sept. 25. CNBC reported that the bill has bipartisan support in the committee. Republican Sen. Steve Daines of Montana told the financial news network the votes are there to pass the bill in the full Senate.
Republicans in general have softened on federal marijuana reform in a shift that could make it a reality. As we head into a key election season and with the majority of Americans favoring legalization, we should finally see politicians pass long-overdue reforms.
Republicans soften on federal marijuana reform in a shift that could make it a reality
A bill that would let legal marijuana businesses get access to major financial and banking institutions will likely have the votes to pass the Senate.
— Todd Harrison (@todd_harrison) September 15, 2023
Sen. Kevin Cramer, (R-N.D.), echoed Daines, saying, “I feel pretty good about passing the bill.”
White House Press Secretary Karine Jean-Pierre said during a briefing on Friday that Biden has “always” supported the legalization of cannabis for medical purposes. In addition, economies at the state and federal level could use the additional tax revenue at the current time as deficits soar to record levels.
Moving marijuana from Schedule I to III would facilitate medical research and benefit pot suppliers. Passage of the SAFE Banking Act will allow retailers to accept credit cards and open companies to better forms of financing. The rescheduling may open the gates for new capital to flow into the sector and accelerate legalization (medical or adult use) in many states, increasing the size of the market and pushing up share prices for cannabis stocks.
I don’t think investors are fully appreciating the magnitude of this news and the high odds that both the rescheduling and the passage of SAFE happen by year end. While we have seen a nice bounce of around 80% across the sector, the AdvisorShares Pure US Cannabis ETF (MSOS) would still need to go up 6x (500%) to return to the 2021 highs. And those prior highs were reached with fewer markets and a much less mature industry.
I don’t expect a 6x overnight, but it gives some scope to the potential upside ahead. Even if we get only half way back to those valuations, we are still likely to see cannabis stock valuations increase by 3x in the months ahead.
Top U.S. Cannabis Stocks
When this news first broke, I put together a comparative analysis of US multi-state operators (MSOs) for Nicoya Research subscribers. This was done to help in determining which additional cannabis stocks to add to our HGS portfolio. There are 9 different categories and I highlighted the best data points in each category by assigning a gold, silver or bronze shading. I gave 3 points for each gold, 2 points for each silver and 1 point for each bronze, coming up with a total score and ranking. Of course, this does not include every possible data point that is important in financial analysis, but it does contain most of the top ones to help us understand valuation, growth, profitability, and debt.
I am sharing most of the analysis and results, other than the top pick out of respect to our paying subscribers. This should still help to highlight some of the best cannabis stocks in the United States and give potential subscribers an idea of the types of research we provide to subscribers. Please note that we recently ran a similar analysis for cryptocurrency mining stocks, posted in to our chat room and sent it to Crypto Corner subscribers.
You can always choose to purchase the ETF MSOS or another cannabis ETF to get diversified exposure to the sector. But we are in a stock pickers market and believe that with detailed research, investors can outperform sector averages by picking the best-in-breed companies within each sector. Either way, we believe that the bounce in the cannabis sector is just getting started and there is significantly more upside ahead.
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