Following a Wall Street Journal report, cannabis stocks surged Monday due to speculation that US President Donald Trump is considering reclassifying marijuana to a lower danger level.

Canopy Growth and Tilray Brands both saw surges of over 12% on Monday. 

Cronos Group climbed more than 5%, reaching a new 52-week high in early trading, according to a CNBC report.

Similarly, the AdvisorShares Pure US Cannabis ETF (MSOS) and Amplify Alternative Harvest ETF (MJ) each experienced gains exceeding 10%.

Low price point

Many cannabis stocks in the sector trade at remarkably low prices, often less than a dollar per share. 

This low price point means that even small fluctuations of a few cents can translate into substantial percentage changes in stock value, making these stocks highly volatile. 

Despite a recent rally, which saw some positive movement on Monday, the majority of these cannabis stocks remain far below their historical all-time highs. 

Investors in this sector are currently navigating a high-risk landscape, where the potential for significant gains is accompanied by an equally high risk of further declines. 

The future trajectory of these stocks will largely depend on evolving regulatory frameworks, improved market demand, and the ability of individual companies to execute sustainable business models.

Earlier this month, Trump discussed the issue at a fundraiser held at his New Jersey golf club, according to attendees.

Federal change

Under US federal law, the classification of cannabis as a Schedule I drug places it in the most restrictive category, signifying a high potential for abuse and no accepted medical use. 

This categorisation, which includes substances like heroin and cocaine, has significant implications for research, medical applications, and legal enforcement. 

Historically, discussions regarding the reclassification of cannabis have often revolved around moving it to Schedule III. 

This less restrictive category includes drugs with a moderate to low potential for physical and psychological dependence, such as anabolic steroids and certain pain medications like Tylenol with codeine. 

Such a reclassification would acknowledge potential medical benefits and facilitate further research into its therapeutic applications, while still maintaining some federal control. 

The ongoing debate highlights a significant divergence between federal law and the increasing number of states that have legalized cannabis for medical or recreational use, creating a complex legal and regulatory landscape.

Reclassification benefits

Reclassifying marijuana companies would bring about various advantages, including different tax regulations and increased investment appeal.

Tim Seymour, investing chief at Seymour Asset Management, was quoted in the CNBC report on Monday, stating that a shift from Schedule 1 to Schedule 3 could “change the game” for the approximately $80 billion market. 

He also observed that this change appears to have bipartisan backing.

It does not mean that it won’t be a complicated trade,” Seymour said. “But it does mean that you’re investing now well ahead of a lot of institutional capital if you are, in fact, investing into this sector.

While Trump’s support can improve the prospects for reclassifying the drug, he lacks the unilateral authority to do so. 

The power to reclassify substances under the Controlled Substances Act rests with the Attorney General, who has historically delegated this authority to the administrator of the Drug Enforcement Administration.

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