Easy come, easy go. Yesterday, shares of cannabis companies like Canopy Growth(NASDAQ: CGC), Tilray Brands(NASDAQ: TLRY), and Cronos Group(NASDAQ: CRON) all soared on news that the U.S. Drug Enforcement Administration (DEA) has agreed to recommend downgrading marijuana from a Schedule I drug to a Schedule III drug. Already today, the high is starting to wear off.
As of 11:15 a.m. ET Wednesday, Canopy Growth stock is down a shocking 25.7%, followed by losses of 17.6% at Tilray and 7% at Cronos (which I suppose qualifies as the "good" news today).
The great marijuana stock sell-off
Why are marijuana investors panicking today? Let's start with the obvious.
A Schedule III drug (such as ketamine, anabolic steroids or, soon, marijuana) may not be as strictly regulated a Schedule I drug (like heroin). But it's still regulated. You can't just stroll into a liquor store, show your ID, and pick up a pack of weed like you can when buying smokes or alcohol. You can't even buy a Schedule III drug at the pharmacy desk at CVS or Walgreens. Furthermore, state-licensed marijuana dispensaries are still selling a product that it's illegal for them to sell under federal law.
Rescheduling marijuana will also come with new costs for the marijuana industry, first and foremost, from requiring the nation's 15,000 licensed dispensaries to all register with the DEA and make regular reports on their activities.
Should you buy marijuana stocks?
If you ask me, though, the main reason marijuana stocks are selling off today is because marijuana investors made a lot of money yesterday, and they're cashing in their chips and taking profits. That's short-term thinking, however.
Dropping marijuana two rungs to a Schedule III controlled substance is really good news for the industry and will accelerate the movement among states to legalize the drug both for medical purposes (as 38 have done) as well as for recreational purposes (as 24 have done). It will also provide some tax benefits for marijuana companies, permitting the deduction of certain operating expenses that could not be deducted when marijuana was a Schedule I drug. This will have a direct benefit for cannabis companies' bottom line, boosting profits and making marijuana stocks look cheaper as a result.
At the same time, rescheduling marijuana adds momentum to the federal legalization movement. In the U.S. Senate, Majority Leader Chuck Schumer, D-N.Y., yesterday reaffirmed his support for passing marijuana banking reform. He furthermore expressed his commitment to "removing [marijuana] from the Controlled Substances Act" entirely -- legalizing the drug once and for all.
Despite today's sell-off, Canopy Growth, Tilray Brands, and Cronos Group stocks are still trading higher than they did before the DEA's announcement. With profits moving higher and full-scale legalization looking increasingly likely, there's good reason for that.
Should you invest $1,000 in Canopy Growth right now?
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health and Tilray Brands. The Motley Fool has a disclosure policy.
