Cannabis stocks pull back after rallying on DEA's plans to reclassify marijuana

By Steve Gelsi

Canopy Growth, Tilray and Curaleaf all slide after sharp gains on the federal government's plan to make pot a Schedule III controlled substance

Canopy Growth Corp., Tilray Brands Inc. and Curaleaf Holdings Inc. were among falling cannabis stocks Wednesday, a day after news of the federal government's plans to reclassify marijuana.

The pot sector cooled off after a huge rally Tuesday, sparked by the Biden administration's plans to recategorize cannabis as a less dangerous, Schedule III substance under federal law.

Canopy Growth (CGC) was down 26%, Tilray Brands (TLRY) dropped 17%, Curaleaf (CURLF) fell more than 8% and Trulieve Cannabis Corp. (TCNNF) dropped 13.5%. TerrAscend Corp. (TSNDF) and Cresco Labs Inc. (CRLBF) were down 16.5% and 10%, respectively.

On the fund front, the AdvisorShares Pure U.S. Cannabis ETF MSOS was moving lower by nearly 13%, while the Amplify Alternative Harvest ETF MJ was losing about 12% of its value.

In the previous session, Canopy Growth notched its second-largest one-day gain in the stock's history, jumping by a whopping 79%, on the heels of reports that the U.S. Drug Enforcement Agency plans to lower cannabis' classification from Schedule I, defined by the agency as "drugs with no currently accepted medical use and a high potential for abuse."

Marijuana has been classified as a Schedule I substance since 1970, placed in the same bucket as heroin, ecstasy and LSD. Schedule III substances include ketamine, testosterone and anabolic steroids, and are typically available through a doctor's prescription.

In the wake of the reports, the U.S. Department of Justice issued a statement confirming that Attorney General Merrick Garland had circulated a proposal to reclassify marijuana to Schedule III.

"Once published by the Federal Register, it will initiate a formal rulemaking process as prescribed by Congress in the Controlled Substances Act," the statement said.

John Hartmann, chief executive of cannabis company Ascend Wellness Holdings Inc. (AAWH), told MarketWatch that he expects the change in federal law to "have a dramatic effect on taxation and capital availability" for the industry.

"It's been anticipated for many years - it's a very positive step," Hartmann said. "We've been told by institutions and lenders they'd enter the sector."

While the process may take until 2025 to complete, the move by Garland marks a major step in the right direction, he said.

Meanwhile, Democratic lawmakers led by Senate Majority Leader Chuck Schumer, Senate Finance Committee Chairman Ron Wyden and Senator Cory Booker said Wednesday they're reintroducing legislation to remove cannabis from the Controlled Substances Act.

Michael Harlow, a managing partner at CohnReznik who works on tax matters with cannabis companies, said the Schedule III redesignation raises questions about the 280E tax requirement that prevents dispensaries and other plant-touching businesses from taking standard tax deductions.

While a Schedule III status for pot would eliminate 280E, it's unknown whether companies will be able to reflect the change for the 2024 tax year, or even previous tax years, in filings with the Internal Revenue Service, Harlow said.

"I'd be shocked if the IRS has regulations ready to go to address this," he noted. "The details still have to be worked out."

Cannabis companies may be more aggressive in asking for 280E rebates or exemptions now that the federal government plans to remove cannabis from Schedule I, Harlow added.

James Hagedorn, chief executive of Scotts Miracle-Gro Co. (SMG), said the company's Hawthorne cannabis-growing equipment unit expects to see the realization of pent-up demand for its wares in the wake of the news.

Cannabis companies have been putting off investments in capital equipment because of the burden of paying higher taxes, he noted. Rescheduling is expected to reduce that tax burden.

Hagedorn also said he expects further consolidation in the growing-equipment business and that Scotts Miracle-Gro may be on the hunt for acquisitions.

-Steve Gelsi

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05-01-24 1518ET

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