Shares of Tilray Brands (NASDAQ:TLRY) soared more than 40% on Monday, back to around the levels they were at in February of this year. And in after-hours trading, it was up over 10%. Up until recently, it was looking like it would be another brutal year for the cannabis and beverage stock. Why has Tilray suddenly taken off, and are these gains sustainable, and is it worth investing in the business right now? Let’s take a look.
Marijuana reform on the horizon?
The big news that boosted Tilray and other cannabis stocks today was news that U.S. President Donald Trump was looking at reclassifying marijuana as a less dangerous substance. Currently, it’s a Schedule I substance, which puts it in the most dangerous category, along with heroin, ecstasy, and LSD, for drugs where there is no currently accepted medial use, and where there is a high potential for abuse.
This sounds hard to believe when you consider that dozens of states in the U.S. have legalized marijuana for not only medicinal use, but also recreational use as well. Even internationally, there are places which have recognized medical benefits associated with marijuana and permitted its use for medicinal purposes.
But the problem is there is a huge disconnect between the U.S. federal law and state laws. Marijuana is still illegal at the federal level. But in many states, it’s legal. It’s a messy situation. The big problems comes with respect to transporting cannabis. For example, even though marijuana is legal in both Oregon and Washington, it would be against federal law to transport it across state lines, and that’s when it can become a big issue for the federal government. This means that effectively, any state that a cannabis company wants to be selling its products in, it needs to have both production and distribution setup there. There are no usual economies of scale that exist by being a large operator with a presence in multiple states. And that’s one of the reasons cannabis companies in the U.S. struggle to post profits.
Reclassifying cannabis doesn’t help Canadian cannabis stocks
So how does reclassifying marijuana in the U.S. help Tilray? The short answer is, it doesn’t. Tilray is a Canadian-based company and reclassifying the drug to a less dangerous substance still wouldn’t legalize it. And until legalization takes place, it would not be possible to import any cannabis products from Canada into the U.S. Schedule III substances are still controlled substances.
The long answer, however, is that investors are reading into this that it’s a sign that reclassification may be the first step towards eventual legalization of marijuana. It’s a leap, to say the least. Legalization would be a long, complicated process. And with Republicans, who have traditionally taken a tough stance on drugs, controlling both the House and Senate, it certainly wouldn’t be easy to pass any pro-cannabis bills.
Reclassifying cannabis to Schedule III would pave the way for more research to be done on cannabis. And the big win would actually come for companies which are already operating in the U.S. That’s because if marijuana were rescheduled to Schedule III, then Section 280E of the tax code would no longer apply, and it’s this section which prevents cannabis companies in the U.S. from being able to deduct ordinary business expenses from their tax filings. In essence, it would result in tax savings for them. But the companies that would benefit from this would be the cannabis producers and multi-state operators that are already in the U.S. In other words, not Tilray.
It’s a complicated issue but the key to remember is that Tilray doesn’t benefit from any of these developments unless legalization takes place, and when cannabis can be legally imported in the U.S. – that isn’t happening anytime soon and I don’t believe Trump has even hinted at such a possibility. Rescheduling cannabis and even decriminalizing it are vastly different from full-blown legalization, which is what Tilray would need to truly benefit from marijuana reform in the U.S.
Investors should be careful with cannabis stocks
Legalization made virtually no progress under Biden’s administration and when Democrats had full control of the House and Senate. It was the best opportunity to push legalization forward, and it was ultimately wasted. I don’t see it any more likely to happen now. Trump hasn’t even committed to rescheduling cannabis, and investors are buying up Tilray’s stock as if that’s not only a sure thing, but that legalization may be coming soon as well.
Tilray isn’t a buy on this news. It isn’t any safer of an investment, and the U.S. market isn’t opening up for Canadian companies. If you want to invest in companies that will actually benefit from these developments, look at the big multi-state operators in the U.S., like Green Thumb, Cresco Labs, Curaleaf. Tilray, however, is still a high-risk stock to own, and these latest developments change absolutely nothing.