Finally. Marijuana Gets Reclassified, but Are Pot Stocks Still Too Risky?

Markets don’t usually wait for permission — they anticipate it. That’s why cannabis stocks jumped ahead of the official news that the Justice Dept. would reclassify marijuana from Schedule I to Schedule III. But here’s the real question investors should be asking: does this long-awaited shift actually change the investment case, or just the headlines?

Let’s dig into what this move means — and what it doesn’t.

A Long-Awaited Shift — and a Quick Reality Check

The DOJ officially moved marijuana to Schedule III, placing it alongside drugs like ketamine and certain steroids instead of heroin or LSD. That’s not legalization — but it’s a meaningful policy shift.

The market reaction came fast:

• Tilray Brands (NASDAQ:TLRY) rose 14% yessterday
• Canopy Growth (NASDAQ:CGC) climbed 21% 
• Aurora Cannabis (NASDAQ:ACB) was up a more muted 6.7%
• All three stocks are lower in midday trading, down mid- to high-single-digits

That pullback tells you something important: traders were positioned early and are now taking profits. Step back further, and the longer-term picture looks less encouraging:

That’s not a sector riding a wave of sustained momentum. It’s one still trying to find its footing.

What Schedule III Actually Changes

Let’s strip away the jargon. Reclassification doesn’t legalize marijuana federally — states still operate under a patchwork of laws. But it does remove one major obstacle: IRS Code Section 280E. That means cannabis companies could now deduct ordinary business expenses.

Here’s why that matters:

• Under Schedule I, companies couldn’t deduct payroll, rent, or marketing
• Effective tax rates often exceeded 60% to 70%, based on company filings and IRS guidance
• Moving to Schedule III allows normal corporate tax treatment — typically 21% federally

That’s a direct hit to the bottom line — and a positive one.It also improves access to banking services (fewer restrictions for lenders), credit markets (lower borrowing costs), and Institutional capital (previously sidelined investors may step in)

Tilray, for example, reported in its latest earnings release that it generated $188 million in quarterly revenue, but profitability has remained inconsistent. Lower taxes could help — but only if core operations improve.

Canopy Growth, meanwhile, reported $78.5 million Canadian ($53.5 million) in quarterly revenue in its most recent filing, with continued net losses. Tax relief helps — but it doesn’t fix declining sales.

Reclassification vs. Legalization Is Still a Big Gap 

Here’s where expectations and reality diverge. Investors have been waiting years for a breakthrough moment. This feels like one — but it’s not the finish line. Surprisingly, state-level legalization hasn’t delivered the growth many expected:

• California’s legal cannabis market saw sales decline 11% year over year in 2025, its third consecutive year of decline
• Price compression from oversupply continues to pressure margins across multiple states

Canada offers another cautionary tale. After full federal legalization in 2018, Canopy Growth and peers faced regulatory bottlenecks and high excise taxes, many producers struggled with inventory write-downs and excess capacity, while profitability has remained elusive years later. In other words, legalization didn’t eliminate business challenges — it exposed them.

Reclassification is an even smaller step.It removes friction, but doesn’t create demand.

Key Takeaway

In short, this is progress. Real progress. Lower taxes, better banking access, and reduced stigma all help the industry mature.

But investing isn’t about headlines — it’s about outcomes. Here’s what the numbers and trends tell us:

• Cannabis companies still struggle with profitability and pricing pressure
• Revenue growth has flattened or declined in key markets
• Stocks like Tilray Brands, Canopy Growth, and Aurora Cannabis remain far below their highs — 67%, 46%, and 48%, respectively

Granted, lower taxes could improve margins. That said, margins only matter if there’s sustainable demand and disciplined supply. Reclassification is a necessary step. It is not a sufficient one. For investors, that distinction matters.

When all is said and done, cannabis remains a story of potential — not proven performance. Until these companies show consistent revenue growth, positive free cash flow, and pricing power, sharp investors should treat rallies like this as trading opportunities, not long-term entry points.