As the trading year 2025 draws to a close, the cannabis sector presents a confusing picture for the average investor.
On Dec. 18, 2025, President Trump signed a pivotal Executive Order directing the Attorney General to expedite the rescheduling of cannabis. By all traditional metrics, this political victory should have sparked a sustained rally. Instead, the market responded with a sharp sell-the-news correction.
Leading equities in the space have retreated significantly, trading near their yearly lows. This adverse price action indicates a market suffering from exhaustion. Investors, weary after years of bureaucratic delays and false starts, largely ignored the long-term implications of the order, focusing instead on the lack of immediate, overnight legalization.
However, experienced analysts suggest this pessimism has created a contrarian opportunity. The market is currently pricing cannabis stocks as if the regulatory reform has already failed. Yet, the data suggests the administration is moving toward a concrete regulatory shift in 2026. This stark disconnect between depressed valuations and improving political probabilities has created an oversold condition. While the crowd is selling, the fundamental setup for 2026 suggests the sector may be coiled for a reversal.
The Macro Catalyst: From Red Tape to Green Cash
The potential for a turnaround in 2026 is based on tax law. The Wildcard scenario hinges on the administration successfully moving cannabis from Schedule I to Schedule III under the Controlled Substances Act. While this sounds like a minor administrative change, it effectively functions as a massive corporate tax cut.
Currently, U.S. cannabis operators (and those preparing to enter the market) are handcuffed by IRS Section 280E. This tax code prohibits businesses that traffic in Schedule I or II substances from deducting standard business expenses.
- The Current Problem: A regular business deducts rent, payroll, and utilities from its revenue before calculating taxes. Cannabis companies cannot. They pay taxes on their gross profit. This often results in an effective tax rate of 70% or more, obliterating cash flow.
- The 2026 Solution: If cannabis moves to Schedule III, Section 280E vanishes. Companies could immediately deduct all standard operating costs.
For the stock market, this is the critical variable. The removal of 280E transforms the financial model of the entire industry. It clears the path for companies to move from burning cash to generating free cash flow. If the Executive Order signed in December leads to a finalized rule in 2026, valuations will likely reset to reflect this new, profitable reality.
Canopy Growth Corporation: The Aggressive U.S. Bet
For investors seeking aggressive exposure to the potential opening of the U.S. market, Canopy Growth Corporation (NASDAQ: CGC) remains the primary vehicle.
The company has spent the last two years radically transforming its business model into an asset-light structure, divesting heavy cultivation facilities to reduce overhead and preserve capital.
Canopy’s investment thesis revolves around Canopy USA. This unique corporate structure allows the company to hold economic interests in U.S. assets without violating NASDAQ listing requirements. The strategy is binary: the moment federal rescheduling allows, Canopy USA can trigger the complete acquisition of these profitable entities, instantly consolidating their revenue.
While waiting for Washington to act, Canopy is not standing still. On Dec. 15, 2025, the company announced the strategic acquisition of MTL Cannabis.
- Supply Chain Security: The deal secures a consistent, high-quality flower supply, which is critical for maintaining market share in Canada.
- Export Capability: MTL strengthens Canopy's ability to serve international medical markets, providing a revenue bridge while the U.S. strategy matures.
Combined with a cost-reduction program delivering approximately $21 million in annualized savings, Canopy has positioned itself to survive the current volatility and scale rapidly once the regulatory environment shifts.
Tilray Brands: The Diversified Fortress
Tilray Brands, Inc. (NASDAQ: TLRY) offers a different value proposition, focusing on stability through diversification.
Rather than betting the entire company on a single regulatory outcome, Tilray operates on three pillars: Cannabis, Wellness, and Beverage Alcohol.
If political delays persist into 2026, Tilray possesses a built-in safety net. Following a series of acquisitions in 2024, Tilray has established itself as the 5th-largest craft brewer in the U.S., owning recognizable brands such as Hop Valley and Terrapin. Selling craft beer and bourbon provides a reliable cash flow that insulates the company from the inherent volatility of the cannabis sector. Furthermore, the company is executing Project 420, a plan designed to streamline operations and save millions across its beverage and cannabis lines.
Management has also taken decisive action to clean up its capital structure. On Dec. 1, 2025, Tilray executed a 1-for-10 reverse stock split.
- Institutional Access: Many large institutional funds cannot buy stocks trading under $5.00. By moving the share price higher, Tilray has reopened the door to these smart money investors.
- Compliance: The move ensures long-term compliance with NASDAQ, removing the threat of delisting.
Additionally, Tilray continues to dominate in Europe, holding a cultivation license under Germany’s new Cannabis Act. This international footprint allows them to grow revenue regardless of what happens in the White House.
The Bear Trap: Anatomy of a Short Squeeze
Currently, both Canopy Growth and Tilray Brands are trading at historically low valuations relative to their sales. Despite these bargain prices, short interest, the volume of shares borrowed by investors betting the price will fall, remains elevated.
These short sellers are essentially gambling that the federal government will fail to execute the rescheduling order. This creates a high-risk scenario for the bears.
- The Trap: If a concrete positive announcement hits the wires, such as the DEA publishing the final Schedule III rule, the thesis for shorting the stock collapses.
- The Scramble: Short sellers must buy shares to cover their positions and exit the trade.
- The Squeeze: This forced buying creates a feedback loop. As shorts buy, the price rises, causing more shorts to buy.
Because sentiment is so overwhelmingly negative, even a small dose of good news could trigger this chain reaction. The heavy short positioning acts as dry powder; a regulatory spark could ignite a rapid and violent upside move.
2026 Outlook: Time for Execution
The year 2025 was defined by waiting, but the landscape for 2026 has fundamentally shifted. The companies are leaner, their cost structures are improved, and the President has issued a direct order to cut the regulatory red tape.
Investors are now looking at a binary window. If the administration executes on its directive, the removal of the 280E tax burden could justify significantly higher stock prices. The sector has moved from hope to execution. For those monitoring the sector, the current prices represent a clear risk, but they also represent a potential historic discount if the political wildcard plays out in favor of the industry.
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The article "The 2026 Cannabis Wildcard: How Tax Reform Could Reset Stock Valuations" first appeared on MarketBeat.
