Marijuana Rescheduling Has Arrived. Don't Make This Mistake

For years, the Drug Enforcement Administration has classified marijuana as a Schedule I substance, alongside many harmful drugs, including heroin, ecstasy, and LSD. Recently, U.S. President Donald Trump has pushed for the rescheduling of marijuana, and last week, his administration eased the rules for licensed medical marijuana, moving it into a less harmful category of Schedule III. Recreational products haven't been rescheduled yet, but that could happen later this year.

While this may be a positive development for the industry, it's important to know what this does and doesn't mean, as it won't necessarily affect all marijuana stocks equally. Here's what you need to know to avoid making a potentially costly mistake.

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Marijuana rescheduling will lower taxes for U.S. operators

The most important takeaway from the rescheduling news is that the biggest winners from this will be U.S.-based pot stocks. Companies such as Curaleaf Holdings, Green Thumb Industries, and Trulieve Cannabis will see their tax bills decline. With medical marijuana now a Schedule III substance, section 280E of the tax code no longer applies to that area of their businesses, enabling them to claim more expenses, thereby reducing their taxes and boosting profitability.

Equally important to note is that this will not provide much, if any, noticeable benefit for Canadian-based companies such as Tilray Brands (NASDAQ: TLRY), which don't sell marijuana products in the U.S. due to the ongoing federal ban. Until legalization happens, which is by no means inevitable due to rescheduling, the U.S. market remains largely off-limits for Tilray Brands and other Canadian producers. The mistake many investors make is in assuming that this will lead to legalization or somehow benefit Tilray Brands and all pot stocks as a whole, and that is simply not the case.

Not all pot stocks will benefit from rescheduling

When the excitement around rescheduling surfaced, shares of Tilray popped. On April 22, the stock jumped 14% by the day's close, only to end up falling afterwards after the official details came out. Speculation around legalization is largely what has given Tilray's stock a boost in recent years, as its own underlying results haven't been enough to convince investors that it's a good growth stock, or that it even has a realistic path to profitability.

Year to date, Tilray's stock has declined by 27%. Unfortunately, without a growth catalyst or reason to be more bullish about its future prospects, the stock may continue to fall even further in the weeks and months ahead. Buying it and other pot stocks on news or rumors of marijuana reform can be risky without knowing the full details or what it might mean for a business. While marijuana reform may be positive for the industry as a whole, that doesn't mean every single pot stock will benefit.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool recommends Green Thumb Industries and Tilray Brands. The Motley Fool has a disclosure policy.