Cannabis Stocks Worth a Second Look? What Recent Momentum Tells Investors

The Reality Check: Why Cannabis Stocks Have Disappointed

For years, cannabis stocks have been a cautionary tale in the investment world. The contrast is stark: while the S&P 500 has roughly doubled over the past five years, the AdvisorShares Pure US Cannabis ETF (MSOS) has plummeted by 77%. Tilray Brands (NASDAQ: TLRY), one of the sector’s most recognizable names, exemplifies this volatility—despite climbing 27% this year and hitting new 52-week highs, its three-year return sits at a dismal negative 46%.

Yet something has shifted in recent weeks. As government discussions intensify around potentially rescheduling cannabis to a lower classification, investor sentiment has begun to thaw. Is this finally the moment to reconsider cannabis stocks as a portfolio addition?

The Reform Catalyst: What Could Change Everything

The federal status of cannabis remains the core constraint limiting growth. Currently classified as Schedule I alongside LSD and heroin, cannabis can’t legally cross state lines. This fragmentation forces companies to operate inefficiently across fragmented markets. Even major players like Tilray, based in Canada, are barred from directly participating in the U.S. market and must resort to indirect strategies like alcohol company investments.

The potential shift to Schedule III classification could be transformative. This reclassification would signal medical acceptance and unlock critical tax benefits. Under current Section 280E tax code provisions, cannabis companies cannot deduct ordinary business expenses, artificially inflating their effective tax rates. Rescheduling would level this playing field, potentially doubling profitability for multi-state operators overnight.

Beyond tax relief, Schedule III status could accelerate FDA research initiatives and fundamentally reshape investor perception from speculative bet to legitimate sector.

The Valuation Picture: Opportunity or Trap?

Despite recent rallies, cannabis stocks remain heavily discounted. Tilray’s market capitalization has contracted from a peak of nearly $17 billion in early 2021 to approximately $1.8 billion today. The stock trades at just 1.8 times trailing sales and 1.2 times book value—valuations that reflect extreme skepticism about future prospects.

This deep discount presents a paradox: either the market correctly prices in near-zero reform odds, or significant upside awaits patient investors betting on policy change. Historical precedent suggests caution. Multiple cannabis reform bills have emerged and faded. Government rhetoric doesn’t guarantee legislative action.

Making the Investment Decision

Investing in cannabis stocks requires honest self-assessment. These remain speculative positions suited only for investors with genuine high risk tolerance and capital they can afford to lose for years without panic.

The fundamental question isn’t whether cannabis stocks can rally if reform happens—they likely would. The question is whether you believe reform is coming soon enough to justify the wait, and whether you can withstand the volatility in the interim.

For most investors, a measured wait-and-see approach remains prudent. Hold cash, monitor policy developments, and prepare to act decisively if genuine legislative momentum materializes. The cannabis sector’s recovery isn’t inevitable, but neither is it impossible. That uncertainty demands respect.