The U.S. Department of Health and Human Services recently called for cannabis to move from Schedule I (the most restrictive category) to Schedule III. While the transition hasn’t taken effect yet, and rescheduling still falls short of decriminalization, a reclassification would have a major impact on U.S. cannabis stocks.
Critically, rescheduling could tweak cannabis stocks’ financial standing quickly. For example, the tax code currently treats cannabis companies operating legally in their state as federal criminals. Specifically, these companies cannot count business expenses as a deduction on tax filings. So, while the businesses are paying taxes as required, they’re paying far more than non-cannabis companies. That doubles their effective tax rate, which wreaks havoc on GAAP profit margins. Rescheduling would mean an instant tax cut and margin expansion. In other words, companies would have more money in their pockets to expand operations or return value to shareholders.
Curaleaf Holdings (CURLF)
Curaleaf Holdings (OTCMKTS:CURLF) could be the biggest winner of rescheduling efforts, and the company’s stock price reflects its potential. This cannabis stock has almost doubled since the news broke, but there’s further upside for the U.S.-based cannabis company.
Curaleaf operates 150 dispensaries across 18 states. That market penetration in the U.S. alone positions Curaleaf as a dominant beneficiary of rescheduling and continued hints of legalization. Despite its penny stock status, Curaleaf is on decent financial footing. Revenue remains steady even in the face of degraded economic conditions. Likewise, the company’s cost-cutting measures led to a 48% adjusted gross profit margin.
Wall Street is taking a bullish tone based on its market share and a potential boost from rescheduling. Of 14 polled analysts, 12 say Buy and 2 believe the stock is worth a Hold. While CURLF is riding high, there’s still potential upside for investors interested in a U.S. cannabis stock.
Tilray Brands
Tilray Brands (NASDAQ:TLRY) stands to benefit less, as their recreational cannabis operations primarily center in Canada, but there’s still upside potential. Critically, if rescheduling or legalization happens, Tilray has a logistics network far beyond its competitors’ scope. That network comes from the company’s diversified product line. Diversification also benefits the business’ financial standing, as they aren’t wholly dependent on cannabis.
Tilray recently closed a deal with Anheuser-Busch (NYSE:BUD), buying eight of its craft beer businesses, including loved brands like Shock Top. That positions Tilray as the fifth-largest craft brewer in the United States and lets it capitalize on a booming beer market. The expansion also opens up access to new marketing talent and, critically, distribution networks and all the vehicles, facilities and expertise that go with them.
As cannabis stocks increasingly pivot to offering a range of THC-infused drink products, an established beer network could mean instant access nationally — if Tilray begins selling these products stateside.
Scotts Miracle-Gro (SMG)
Scotts Miracle-Gro (NYSE:SMG) doesn’t sell or distribute cannabis, but rescheduling could be huge for this agriculture company. The business owns Hawthorne Gardening, which sells a range of legal hydroponic equipment and cannabis growing tools to enterprise-level growers. Rescheduling means big things for cannabis stocks. But Scotts is positioned to capitalize on industry-wide growth agnostic about which specific companies come out on top.
Since rescheduling also lessens legal impact for regular citizens, there could be an at-home growing boom similar to home beer brewing. If that happens, Scotts’ subsidiary has the equipment to facilitate the hobby, while its penetration of hardware and gardening stores nationwide means it can put products on the shelves quickly. That accessibility could make Scotts the go-to equipment company for businesses and individuals alike as they take advantage of rescheduling.
On the date of publication, Jeremy Flint did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
