The Drug Enforcement Administration (DEA) may soon reclassify marijuana from a highly risky substance with no accepted medical use in its Schedule I classification down to Schedule III, where there's some acknowledgment that it does have potential medicinal benefits. That would mean pot would no longer be grouped in with heroin, ecstasy, and LSD.
The optimism behind such a move is what has made investors bullish on marijuana stocks this year. Since January, shares of some of the more iconic and recognizable cannabis companies have been on the rise -- Curaleaf Holdings stock has jumped by 15% while Canadian pot producer Canopy Growth (CGC 2.31%), which is eager to jump into the U.S. market, has seen its shares skyrocket by close to 80% thus far.
But cannabis investors have been burned in the past by expecting too much when it comes to potential marijuana reform. Rescheduling cannabis would help make it easier to research cannabis, and it can even lower tax bills for U.S.-based companies, but it wouldn't clear all the hurdles for the industry.
Marijuana will still remain banned in the U.S.
If marijuana is moved down to a Schedule III classification, it could help with a lot of things in the cannabis industry. It could make it easier to do research on the substance and to find other potential uses for it. Many medical marijuana patients already tout its many health benefits, particularly for pain relief. And there could be more reasons to use pot for medical reasons beyond just that -- but more research is necessary to prove that.
But one thing rescheduling won't change is that marijuana would remain illegal in the U.S. While it's possible this might be just the first step toward greater marijuana reform, investors should be careful not to assume that it means legalization will happen soon.
Legalizing marijuana would be a complex process that would touch on areas such as taxes, minimum consumption ages, advertising rules, who could be allowed to sell marijuana, how many licenses could be given out, who would have responsibility for regulating it, and many other considerations. This would not be an easy or quick piece of legislation to draw up, much less pass. Investors should brace for the realistic possibility that it could still take years for legalization to take place, even if they are optimistic about marijuana reform.
Rescheduling won't likely convince big banks or other industries to work with cannabis companies
While rescheduling cannabis to a lower, less serious classification could help the industry in the long run, it won't fix a big problem for marijuana producers, which is gaining access to banking services. While it's not impossible for producers to obtain bank accounts, many of them still operate on a cash basis, which makes them vulnerable to burglaries and adds an element of risk that companies in other industries don't have to worry about.
And simply rescheduling cannabis isn't going to change that. Rob Nichols, president and CEO of the American Bankers Association, doesn't believe this will open up more banking services to cannabis companies. He was quoted by MarketWatch as saying that "cannabis would still be largely illegal under federal law, and that is a line many banks in this country will not cross."
Banks would face greater scrutiny and possibly have to worry about enforcement actions if they take on cannabis companies as customers -- it's simply not a risk worth taking for many of them. This means for cannabis producers in the U.S., it could still be difficult to obtain access to capital that could help fund and grow their businesses in the long run.
This risk may also extend to other industries as well. The federal ban on pot is likely a reason many businesses aren't eager to jump in and partner with cannabis companies. Beer maker Constellation Brands has been the most notable investor -- it invested billions in Canopy Growth in 2018 -- but even it has been distancing itself from the struggling cannabis industry of late as it looks to remove the impact of the cannabis producer's losses from its financials.
Cannabis investors should remain cautious
This year, shares of Canopy Growth have been surging on hopes relating to marijuana reform. But rescheduling marijuana isn't the industry's silver bullet; it won't solve all the problems the industry is facing, not by a long shot. It won't even necessarily lead to legalization.
The danger with pot stocks is that they can often be very volatile and very receptive to any type of news relating to reform. While it may be tempting to assume that rescheduling marijuana will lead to more reform, investors shouldn't assume that legalization is coming.
Canopy Growth and other pot stocks remain highly risky investments, and unless you're comfortable with the volatility that comes with investing in cannabis and the possibility that you may lose most or all of your investment, you may still be better off avoiding the industry entirely.
