Cannabis Stocks: Game-Changing Catalyst for the Sector?

Key Points

• Cannabis stock surged Tuesday following reports the DEA will approve rescheduling of marijuana as a lower-risk drug.
• Reclassifying marijuana could significantly benefit U.S. cannabis companies, but full recreational legalization isn't yet on the table.
• Despite the boost, investor sentiment remains cautious, with significant short positions existing in many leading cannabis stocks.

Cannabis stocks reignited Tuesday afternoon after the U.S. Department of Justice announced that it would move to reclassify marijuana as a less dangerous drug. As a result of the breaking news, several leading cannabis stocks, like Tilray NASDAQ: TLRY, Aurora Cannabis NASDAQ: ACB, and Canopy Growth NASDAQ: CGC experienced notable upticks in volume and price, posting impressive double-digit intraday gains before pulling back on Wednesday. 

If finalized, the proposal could significantly shift cannabis policy and offer many fundamentally changing benefits to U.S. cannabis companies. However, the reclassification will not legalize marijuana outright for recreational use. 

So, with overwhelmingly bearish sentiment prevailing across the sector, indicated by analyst ratings and short interest, will the fresh catalyst be a turning point for the industry and current trends? 

The Impact of Cannabis' Reclassification on Stock Prices

The breaking news in the cannabis sector revealed a significant shift in U.S. drug policy, as the Drug Enforcement Agency (DEA) announced plans to reclassify marijuana from Schedule I to Schedule III. This move, which could take until 2025 to finalize, marks a departure from its current classification alongside drugs like heroin and LSD. 

The U.S. Department of Justice confirmed Attorney General Merrick Garland's proposal to reclassify marijuana. The proposed reclassification could have several significant benefits for the industry. These include expanded research opportunities, reduced criminal penalties, and improved access to banking services for cannabis businesses. Additionally, state-licensed operators may see major relief from outdated tax regulations restricting deductions and credits. 

This development signals a potential turning point in the regulation and perception of cannabis in the United States. So, on the heels of the announcement, let's take a look at how three popular and leading cannabis stocks are trading?

1. Tilray Inc.

Canada-based Tilray Inc. is a pharmaceutical and cannabis company that operates globally in regions like the United States, Europe, Canada, Australia, and Latin America. The company specializes in the production and distribution of medical and recreational cannabis products.

Although there has been a flurry of positive news for the sector this year, Tilray’s stock has been unable to buck the trend. The stock is in the red year-to-date, down just over 12% and trading near its 52-week low end of the range. Sentiment remains bearish on the stock despite its steep decline, as represented by the 15.34% short interest. Analysts are mixed on the name, with a consensus rating of hold and a price target of $2.71.

2. Canopy Growth Co.

Canopy Growth specializes in cultivating and distributing a wide range of cannabis products, serving both medical and recreational users. From dried cannabis to oils, soft gel capsules, and edibles, the company offers diverse options to meet customer needs.

Unlike Tilray, shares of Canopy Growth have surged higher this year, up over 120%. However, despite its outperformance and impressive turnaround, the sentiment remains overwhelmingly bearish on the stock. Regarding analyst ratings, the consensus is a Sell based on two Sell and one Hold ratings. The consensus price target of $4.87 predicts a whopping 56% downside for the stock. That sentiment boils over to short interest, with 13.91% of the float positioned short. 

3. Aurora Cannabis Inc.

Aurora Cannabis and its subsidiaries produce, distribute, and sell cannabis and cannabis-derived products globally. They operate in three segments: Canadian Cannabis, European Cannabis, and Plant Propagation. 

Like Canopy, shares of Aurora Cannabis have significantly outperformed its sector and overall market, with shares up close to 50% year-to-date. However, like the above stocks, despite the several significant benefits of the proposed drug schedule change, investors and analysts remain bearish on the company’s bottom line and timeline for such benefits to kick in. As a result, sentiment remains overwhelmingly bearish on the stock as it does on the sector. 52.55% of the float is sold short, equalling almost 8 million shares.