Why Cannabis Stocks Popped Up to 80% on Tuesday

A cannabis plant grows.

What happened?

Most cannabis stocks were on fire on Tuesday, with shares of companies like Tilray Brands (TSX:TLRY) and Canopy Growth (TSX:WEED) experiencing extraordinary surges of 42% and 80% in a single day, respectively. While it’s not very uncommon for marijuana stocks to witness such volatility, the magnitude of these gains was remarkable. So, what triggered this massive rally in the cannabis sector? Let’s take a closer look at that before we see if these stocks can sustain these gains.

So what’s moving cannabis stocks?

The main catalyst behind the euphoria among cannabis investors on Tuesday was the news that the U.S. federal authorities announced intentions to reclassify marijuana from a Schedule I to a Schedule III controlled substance. But if you ask why that’s such a big deal for cannabis investors, let me explain.

Schedule I substances are those that have no accepted medical use and a high potential for abuse, such as heroin, LSD (lysergic acid diethylamide,) and ecstasy. Schedule III substances are those that have some accepted medical use and a low-to-moderate potential for abuse, such as codeine and anabolic steroids.

By reclassifying marijuana from Schedule I to Schedule III, the U.S. federal government could potentially acknowledge its medicinal value and reduce the legal barriers to research and development. This is one of the key reasons why this decision, influenced by a recommendation from the Department of Health and Human Services, signals a major shift in how marijuana is viewed under U.S. law, which has the potential to benefit most large cannabis players like Tilray and Canopy Growth. This justifies why TLRY stock and WEED stock skyrocketed on Tuesday.

Now what?

While this reclassification is a positive step for the cannabis industry, it does not mean that marijuana is fully legalized at the federal level. Schedule III drugs are still subject to strict regulations and restrictions. In addition, the reclassification may not affect the state laws that vary widely in terms of cannabis legalization and taxation.

Although with these reclassification efforts, cannabis investors anticipate a significant reduction in legal barriers and potential increase in medical research and insurance coverage for cannabis-based treatments, the timeline and full implications of this move are still uncertain. This uncertainty could be the primary reason why, after staging a spectacular rally in the previous session, pot stocks like Tilray and Canopy Growth fell by at least 20% each on Wednesday morning.

Nonetheless, we can’t ignore the fact that recent developments give a long-term bullish signal for the cannabis sector as a whole by strengthening its fundamentals. The reclassification could pave the way for more federal legalization efforts in the future, as well as increase the public acceptance and demand for cannabis products in the years to come. That’s why, despite the short-term volatility and risks, investors who are looking for long-term growth opportunities may want to consider adding some exposure to the cannabis industry, especially in financially solid companies like Tilray.

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The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy. Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.