The Market Overreacted to the DEA's Marijuana Rescheduling -- Here's What It Means for Canopy Growth Stock Now

A long-awaited change in U.S. federal marijuana law occurred in late April, when the Drug Enforcement Administation rescheduled marijuana from its high-risk Schedule I to a Schedule III designation, which is for drugs with accepted medical use and low potential for dependence. The move was initially seen as a historic change for the drug and the industry that's grown up around it.

However, the impact thus far has been relatively muted. Nevertheless, the reform will make a difference to certain cannabis companies. Let's look at how it might -- or, more appropriately, might not -- affect one of Canada's top marijuana companies, Canopy Growth (NASDAQ: CGC).

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Medical relief

The very large catch in the DEA's rescheduling of cannabis is that it applies solely to medical marijuana, not the recreational variety. And medical is restricted, logically enough, to users deemed to have at least one affliction that the drug can treat.

Nevertheless, for some purveyors of pot destined for healthcare use, this is going to make a difference both operationally and financially.

The most crucial of these changes, arguably, is that, in the shift from Schedule I to III, medical product sales are no longer subject to Internal Revenue Service Section 280E. That means companies selling them are no longer limited to deducting only their cost of goods sold; they can also deduct standard business expenses (marketing/advertising, rent, salaries, insurance, and so on).

While this might not exactly result in a windfall for cannabis companies, it provides plenty of relief for those involved in the medical segment. But again, there's a catch here -- Health Canada, that country's healthcare regulator, narrowly limits cannabis export permits to certain medical or research uses. Therefore, north-of-the-border cannabis companies don't have an easy channel to the U.S. for medical products.

Canopy Growth, of course, is a presence on the U.S. market anyway, albeit at some distance. It has an affiliate, Canopy USA, in which it holds only a non-controlling interest, to maintain its clutch of American assets (including medical pot businesses). Of course, there's a catch: The parent company cannot consolidate Canopy USA's results into its own.

So ultimately, we don't have a good fix on how much medical weed Canopy's U.S. "affiliate" sells. Also, absent more meaningful legal reform, this situation won't change, and these sales will remain unconsolidated.

This company needs more than a legal shift

It's likely that this situation is a major reason Canopy Growth officials haven't broken out the party hats. The change will directly affect it when, or if, it graduates to a controlling interest in Canopy USA. Only then can the unit's results be incorporated into its own.

So what are we left with here? Canopy Growth is one of Canada's top pot companies, but given the industry's many struggles, that's not an enviable position. Net profits have been very far and few between, and net losses have been considerable at times. The company's free cash flow habitually runs negative as well.

A clutch of acquisitions hasn't helped lift it into the black; meanwhile, frequent (and often substantial) secondary share issues have left early investors much diluted and, surely, more than a little disappointed.

Legalization in the U.S., or at least a fuller rescheduling of marijuana, is the pearl that many a Canadian pot company with an eye on this country clutches to.

However, I'm not convinced this will be a magic success maker for any weed business, least of all Canopy Growth; the U.S. market is already competitive, and those Canopy USA units aren't collectively powerful enough to dominate what's still a fragmented industry.

The Great Marijuana Rescheduling of 2026, which in the end wasn't so great, isn't going to affect Canopy Growth in any material way. At least, not soon. And given how the company continues to perform, I don't think its stock is a buy.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.