Pot stocks jump as U.S. DOJ moves to reclassify cannabis as a less dangerous drug

By Tanay Dhumal

(Reuters) -Shares of cannabis companies surged on Tuesday afternoon after the U.S. Department of Justice (DoJ) moved to reclassify marijuana as a less dangerous drug.

U.S.-listed shares of Cronos Group, Tilray Brands and Canopy Growth rose between 14.9% and 67.7%, while ETF AdvisorShares Pure US Cannabis soared 24.8%.

Canada-listed Green Thumb Industries and Trulieve Cannabis were also up 26.6% and 37.3%, respectively.

Cannabis firms are taxed under section 280E as a part of Schedule I drug, which disallows them from deducting normal business expenses from their profit, increasing tax burden for the companies. Reclassifying to Schedule III would eliminate this tax, helping towards their profitability.

"This would result in meaningful cash benefits for operators and we estimate a cash benefit upwards of $150 mln," Alliance Global Partners analyst Aaron Grey said in a note.

The proposal, which, if finalized, could potentially be the most significant shift in federal cannabis policy in 40 years, is being sent to the White House Office of Management and Budget for review and to finalize the rule-making process, sources told Reuters.

The reclassification will not legalize marijuana outright for recreational use.

Shares of U.S.-listed marijuana companies had similarly soared in 2019 after Canada legalized recreational marijuana use, but the rally collapsed the following year as underwhelming revenue numbers failed to justify their sky-high valuations.

(Reporting by Tanay Dhumal in Bengaluru; Editing by Tasim Zahid and Anil D'Silva)