These cannabis stocks will benefit most from reclassification

It happened.

The move that everyone in the cannabis sector was hoping for came about swiftly on the last day of April, sending pot stocks across the board soaring.

As reported by AP and other outlets, the U.S. Drug Enforcement Administration is set to reclassify marijuana as a less dangerous drug. It is currently a Schedule 1 drug, on the same level as heroin. The reclassification would equate it to Tylenol with codeine.

“Today, the Attorney General circulated a proposal to reclassify marijuana from Schedule I to Schedule III,” Justice Department director of public affairs Xochitl Hinojosa said. “Once published by the Federal Register, it will initiate a formal rulemaking process as prescribed by Congress in the Controlled Substances Act.”

Analysts Doug Cooper and Russell Stanley cover the sector for Beacon Securities, and in a research update to clients April 30, they summarized the development with an eye towards which companies will benefit the most.

“A Schedule III classification would eliminate the application of IRC 280E, significantly reducing taxes/improving operating cash flow profiles across the space. “…we rank the increase in our F2024E operating cash flow forecast for each company in our coverage universe upon the elimination of 280E. CBST stands out at the top, though our baseline operating cash flow forecast is low ($4M becomes $51M, in its case). We note that TRUL, AYR and AAWH show modest lifts because all three had already indicated plans to pay as normal corporate filers (no 280E payments), and we had reflected that in our operating cash flow forecasts. Formal elimination of 280E still benefits those companies as it should significantly de-risk those strategies. While the exhibit shows quite a range, we view Rescheduling as a benefit for all US operators, as it should significantly improve investor sentiment, and draw additional/new capital to the space,” they wrote.

The analysts thinks the average cash flow lift to cannabis companies will be a whopping 175% and that two pubcos, Cannabist (Cannabist Stock Quote, Chart, News, Analysts, Financials CSE:CBST) and Medicine Man Technologies (Medicine Man Stock Quote, Chart, News, Analysts, Financials CSE:SHWZ) will top that mark, with lifts of 1092% and 213%, respectively.

The analysts think Jushi (Jushi Stock Quote, Chart, News, Analysts, Financials CSE:JUSH) at +156%, Verano (Verano Stock Quote, Chart, News, Analysts, Financials CSE:VRNO) at +148%, Cansortium (Cansortium Stock Quote, Chart, News, Analysts, Financials CSE:TIUM.U) at +123% and Curaleaf (Curaleaf Stock Quote, Chart, News, Analysts, Financials TSX:CURA) at +92% will also be major benefactors.

“This also represents the most significant, tangible federal reform step to date, and we believe Rescheduling will also provide cover to members of Congress to support other federal reform efforts, such as SAFE Banking,” the analysts added.