Aurora, Trulieve, Curaleaf and Other Weed Stocks Are in the Green Again

From last summer’s low, the Pure US Cannabis ETF has doubled, to a recent $10.25. Lighting up its constituents—like

Green Thumb Industries
,

Curaleaf Holdings
,

and

Trulieve Cannabis

—are hopes that federal restrictions on weed may ease, while additional states join the 24 that allow the drug’s recreational sale.

The stocks have a volatile history. So clients have been asking if they can expect continued gains, says the sector’s longtime student Pablo Zuanic, of Zuanic & Associates. “This is a sector that’s very difficult to trade on a short-term basis,” he says. “If you take a longer term view and own quality names, you can be comfortable that there’s a lot more upside.”

The group’s run began in August, when the Food and Drug Administration recommended that cannabis be reclassified from the class of dangerous drugs like heroin, to the milder class of drugs with a medical use—known as Schedule III. That determination will be made by the U.S. Drug Enforcement Administration, possibly this year.

Reclassifying cannabis won’t make it federally legal. But it could lighten an important financial burden on state-licensed operators like Green Thumb. Federal tax collectors haven’t let cannabis sellers deduct operating expenses from their taxable income, like other businesses. That’s left some paying effective tax rates above 75%.

A move to Schedule III would normalize federal tax treatment. How much depends on some nuances, notes Zuanic. Normal tax treatment might only apply to a company’s sales of marijuana through medical prescription, not its recreational sales. The government could make the change retroactive for past tax years, or not.

Some multistate cannabis operators aren’t waiting for the government to act. They are demanding it. The lawyer David Boies sued the federal government in October, arguing that federal restrictions on state-legal operators is a violation of the Constitution’s Commerce Clause. Florida-based Trulieve demanded refunds of federal and state taxes, and has gotten back $113 million so far. Still, Trulieve left a $180 million liability on its balance sheet, in case its tax claim ultimately fizzles.

In January, President Joe Biden put his weight behind weed, with a plug for reclassification in his State of the Union address. Vice President Kamala Harris later called for outright legalization.

Meanwhile, more states are joining the bandwagon. Ohio approved recreational sales, in a November 2023 vote. That’s pressured the Pennsylvania legislature to advance a similar change. This week, Florida’s Supreme Court ruled that the state’s voters can vote on recreational use in November 2024. Florida is already a big market with just medical sales, for chains like Trulieve.

Shares of state-licensed operators like Trulieve and Curaleaf only trade over the counter in the U.S., and without much liquidity. That’s because exchanges like the Nasdaq and the NYSE won’t list the federally illegal businesses.

So the cannabis revival has also lifted the stocks of Canadian marijuana companies like

Canopy Growth
,

Tilray
,

and

Aurora Cannabis
,

which have big listings and institutional investors because their operations in Canada are legal.

The Canadian stocks are proxy plays on the US, because they are listed and liquid, says Zuanic. Canada might reduce the excise tax it levies on them. The Canadian firms have an international opportunity in Germany, whose legislature just legalized recreational use. U.S. operator Curaleaf also has established operations in Europe.

U.S. weed sales are about $100 billion today, with only $30 billion of that going to state-licensed sellers. With federal reform, Zuanic figures the market could grow to $200 billion, with a much larger share going to legal operators.

Zuanic is expanding his coverage of the industry. Among his published recommendations, he has Buys on Green Thumb, and the smaller U.S. operators

MariMed
,

Planet 13 Holdings
,

and

Jushi Holdings
.

As November’s presidential vote nears, Zuanic is watching to see if Biden, or his rival Donald Trump, will take up marijuana in their campaigns.

Write to Bill Alpert at william.alpert@barrons.com