Why Cannabis Stocks Surged on Tuesday

Cannabis stocks surged this week as the United States made yet another move towards legalization — the biggest in over 50 years.

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Cannabis stocks across North America surged on Tuesday from news that the United States Drug Enforcement Administration (DEA) would be moving cannabis to a Schedule III controlled substance. This move has been on President Joe Biden’s agenda for years, and now, the DEA looks poised to make it, sending shares up by as much as 25%.

What happened?

For over 50 years, cannabis has been scheduled as a Schedule I substance under United States federal law. For reference, this is the same category as substances such as heroin or methamphetamines.

Rescheduling the drug to a Schedule III class-action would put cannabis in the same area as other “moderate to low potential for physical and psychological dependence” substances. These items would include drugs such as Tylenol with codeine or anabolic steroids.

It was the largest policy move by the Drug Enforcement Administration (DEA) since 1970, and honestly, the actual announcement by the DEA could still be weeks away. This is because there will need to be a hearing before an administrative judge, and the public can commend. In fact, there is even the possibility the ruling could be blocked should former President Donald Trump be re-elected. Even so, it shows that, on the whole, Americans support the move to reclassify marijuana.

Why it matters

There are a number of reasons that cannabis stocks reacted. Of course, the most obvious are the mere optics of it. But there’s more to it than that. Rescheduling would also mean there would be more room for institutional access to cannabis. This could help create a major boost in cash flow.

Why? As of now, there is a tax law requiring legal cannabis companies to write off standard business expenses. In fact, some companies have been paying tax rates as high as 70% of their net income. So, it is no wonder that many are having difficulty making and maintaining a profit.

In fact, without the tax relief, many cannabis stocks may not last much longer, making this recent announcement all the more important. To be clear, this would not make cannabis legal on a federal level. That’s still up to each and every state. However, it’s yet another major move towards the legalization of cannabis, something cannabis stock investors have been after for a while.

What’s next?

As mentioned, it could even be next year before the rescheduling actually comes into play. Furthermore, it could even be blocked by Trump should he be re-elected. However, this move certainly helps to eliminate the stigma around cannabis companies and help move these companies towards further investment.

Meanwhile, it’s likely that cannabis stocks may fall back down after the major rise in share price. That being said, once that happens, investors may want to watch them closely. Companies such as Canopy Growth (TSX:WEED), for instance, certainly have a major foot in the door with the United States. Once approval is made, the stock could turn profitable practically overnight from these tax incentives.

Shares surged by 81% after the news but came back down by 16% on Wednesday as the market cooled. Even so, it’s clear investors are very much interested in the stock once more. This could mean that investors looking for the growth we saw back in 2017 could have that opportunity once again, especially with a company like Canopy Growth stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe owns shares of Canopy Growth Corporation. The Motley Fool has a disclosure policy.

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