(Bloomberg) -- Investors have been diving into cheap pot stocks in hopes that a change in US policy will unlock major upside for cannabis companies.

A look at funds and stocks following the marijuana industry ahead of the unofficial marijuana holiday of April 20, popularly known as 4/20, reveals that despite little movement on regulatory reform the industry is outperforming the broader market since October. After hitting its lows in 2023, the industry has been benefiting from a buy-the-dip mentality.

Two funds and one index following the cannabis industry have outperformed the S&P 500 Index over the last six months. The Advisorshares Pure US Cannabis ETF has surged 28% in that period and the Roundhill Cannabis ETF — ticker WEED — is up 38%, outpacing the S&P’s 16% gain. The MJ Pureplay Index, an index tracking 100 cannabis industry stocks globally, has gained 25% in the same timeframe. 

“This past year, shareholders have been very sticky,” said Dan Ahrens, managing director of Advisorshares Investments LLC. “People have stuck with it even through bad times because they believe that federal reform is finally going to come.”

Some of the top performing stocks in the last six months include Trulieve Cannabis Corp, which has more than doubled, Green Thumb Industries Inc. and Curaleaf Holdings Inc., both up more than 30%.

Investors are hoping that the US Drug Enforcement Administration will soon announce a reclassification of cannabis that would deem it a controlled substance with medical benefits — like ketamine, anabolic steroids and testosterone. Right now marijuana is grouped with LSD and heroin. The DEA has been reviewing the classification since September after nudging from the Biden administration.

If the DEA approves the policy change it would also remove additional taxes that cannabis companies have to pay, weighing on their ability to generate cash. It could also spark further action in Congress to pass a version of the Secure and Fair Enforcement Regulation (SAFER) Banking Act, which would allow banks and credit unions to work with the legal cannabis industry. 

“I think cannabis stocks could rally 100% with this rescheduling and the momentum that would come with further legislation,” said Ross Gerber, president of Gerber Kawasaki Inc, adding that his firm started buying the Advisorshares ETF recently because it was so beaten down. “No cannabis company that exists today would be here if they weren’t highly efficient.” 

Pot stocks are trading at deep discounts to where they were just years ago at the start of the cannabis boom. The Advisorshares ETF is down 80% since its 2021 peak, while the Roundhill WEED fund has shed nearly 50%. 

Read more: Floundering Weed Stocks Test Wall Street’s Faith in 2024 Rebound

The DEA isn’t bound by a set timeline to make a decision on the reclassification, meaning that an announcement may not come anytime soon. 

“It’s kind of a fool’s game for anybody to try to figure out the timing of it,” said Ahrens. 

Similarly, while the SAFER Banking Act was passed by the Senate Banking Committee in September, it has not been brought to a floor vote yet. Majority Leader Chuck Schumer (D-NY), however, has said the legislation is a priority, especially ahead of the November election.

Read more: Pot Lobby Hits Capitol Hill to Rebound After Losses

“We do see a path for SAFE, though it would require keeping the bill narrow,” TD Cowen’s Jaret Seiberg wrote in a note. “That would allow the bill to be framed as a public safety measure designed to reduce crime around cannabis stores that today do business mostly in cash.”

Despite the barriers, cannabis bulls remain optimistic that progress will come and spark momentum for multiple changes in the industry. 

Ahrens’ conviction hinges on the growing popularity of cannabis products — 24 states, two territories and Washington DC have all legalized weed for recreational use in recent years.

The timing of this year’s 4/20 holiday also underscores the popularity of the sector. “Historically, Saturdays are when consumers explore, indulge, and shop for cannabis,” said Bloomberg Intelligence analyst Kenneth Shea in a note.

Market tracker BDSA data shows that average daily sales on Saturdays in 2023 were 14% higher than the average for all days of the week, he added.

“I’m a big believer of a kind of domino effect or snowball effect,” said Ahrens. “We think it could grow dramatically.” 

(Updates stock moves at market close throughout.)

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