Everything is changing quickly in the marijuana industry and the legal landscape is evolving even faster. Understanding the changes as they occur is going to be extremely important for making successful investment decisions.
It’s an exciting time for investors in this new industry who are now able to purchase shares in companies producing cannabis products for the consumer and medical markets for the first time ever. It has also been somewhat frustrating however, because those investment choices are currently limited by an inconsistent patchwork of laws.
Major US stock exchanges – quite sensibly - will decline to list any companies who are engaged in illegal activity, and since marijuana remains illegal at the federal level in the US, that means no companies who deal directly with marijuana inside the country are traded on the NYSE or NASDAQ.
Currently, the marijuana companies an investor can purchase on those exchanges either operate only in other countries where marijuana is completely legal – most notably Canada – or are US companies that provide ancillary services to the marijuana industry but don’t handle the products themselves. There’s literally even an industry euphemism for that type of business – companies that “Don’t touch the plant."
Many more companies are now operating in a legal grey area in which they are virtually certain of their immunity from criminal prosecution because they are following the laws of the state in which they do business, yet cannot use traditional banking and credit card services or deduct many expenses when calculating taxes owed, and also cannot list their shares on the major exchanges.
If marijuana becomes broadly legal at the federal level in the US, there is likely to be a deluge of investment opportunities as a new crop of surprisingly sophisticated new companies seek to raise capital on major exchanges.
With regard to legalization, public opinion has been changing rapidly, with the latest Gallup poll showing 68% of Americans currently favoring it at the Federal level. Those results show some significant differences of opinion based on age and political affiliation, with younger and more politically liberal respondents much more likely to support legalization than those who are older and/or more politically conservative.
Continued . . .
Get Ready for a New Pot Stock "Gold Rush"
Legalized marijuana, with almost unimaginable profit potential, has just won a clean sweep of 6 election referendums, and has swept over all of Canada, down through 36 states plus D.C. Mexico may be only days away from legalizing pot for both medicinal and recreational purposes.
Global sales are climbing fast and this new industry is predicted to skyrocket from $17.7 billion in 2019 to an expected $73.6 billion by 2027.¹
Not since the Repeal of Prohibition in 1933 has there been such a release of pent-up demand.
It's time to take advantage.
See Zacks' recommended buys >>
In addition to recent scientific research that suggests that marijuana is less harmful to users’ health than other drugs – including alcohol and cigarettes – proponents of legalization also see a potential tax windfall to be gained in the regulation and taxation of marijuana products.
Estimates abound about the potential size of the legal marijuana market ranging from very conservative to wildly exaggerated – including some numbers in the trillions. Careful research estimates that the US market will grow from the $17.7B that was spent on legal marijuana in 2019 to $73.6B through 2027.¹ With state and local taxes of up to 25% in many municipalities where recreational sales are legal, it’s only natural that states and towns see marijuana sales as a way to shore up strained budgets.
The state of Colorado collected $68 million in taxes on legal marijuana sales in 2014 and that number has steadily increased to $267 million in 2018. The state passed the $1B mark in total tax revenues early in 2019.
Right after that though, those tax revenues were sometimes a disappointment. After many years of legal medical marijuana sales, businesses in the state of California sold $500 million less marijuana in 2018 – after it was legal for recreational use - than they did in 2017. The fact that taxes on legal marijuana sales in California range up to 30% seems to be keeping the black market alive.
States and municipalities now understand they need to balance the desire to collect new tax revenue with the basic economics of pricing.
There is also a criminal justice-reform aspect to legalization. Minorities have been disproportionately incarcerated for non-violent marijuana crimes compared to Caucasians, despite evidence that usage rates are similar.
Despite the difficulties posed by the spread of Covid-19 in the US that made it difficult to get cannabis-related initiatives on the ballots, November 2020 was a veritable “green sweep” for legalization with five states easily passing measures to legalize both recreational adult-use and medicinal marijuana possession, use and cultivation.
That brings the total to 15 US states that allow, regulate and tax retail markets for the sale of cannabis products and 36 states that allow medical use. Even more importantly, with the centrally located state of New Jersey voting to approve recreational markets, neighboring states of New York and Pennsylvania - with a combined population North of 30 million people – will be forced to take notice of the potential tax revenues that could potentially be gained by following suit.
Personal Beliefs vs Investment Opportunity
As the Gallup poll demonstrates, a significant number of Americans do remain uncomfortable with the recent pace of change in efforts to legalize marijuana. That’s a perfectly rational position and it’s understandable that investors who share this sentiment might be hesitant to buy the shares of companies who sell marijuana.
Keep in mind however that with a combined $232B in market cap, Phillip Morris International (PM) and Altria (MO) are owned by millions of Americans, either directly or as a component of ETF and mutual funds – even if those investors personally disapprove of cigarettes.
If you’ve read this far, there’s a good chance you can see that there are going to be some really exciting investment opportunities in the marijuana industry.
Let’s take a quick look at how politics and the legislative process might affect the industry.
Is Marijuana Legal?
That’s no longer an easy question to answer.
In terms of federal law, the answer is “no.” Marijuana remains illegal in the US and is classified as a Schedule 1 drug. The DEA and the Justice Department continue to investigate and prosecute those who violate federal law with regard to marijuana.
At the state and municipal level, the water is much murkier. Thirty-six states allow the cultivation, sale, possession and/or use of marijuana for medicinal purposes, and 14 States and the District of Columbia allow the use of marijuana for recreational purposes.
Drilling down even lower, in states where marijuana is legal, counties and cities have generally been empowered to enact their own rules that are more strict than the applicable state law. The result is the patchwork regulatory quilt that means that there are spots in the country where a retail store might sell marijuana products legally, while the same business would be prohibited from operating directly across the street in a different municipality.
Former Attorney General Eric Holder made it clear that the Justice Department would respect the laws of the individual states and that there would be no federal prosecutions of marijuana crimes as long as the behavior was legal under state law.
Momentum Toward Legalization
Previous attempts to legalize marijuana at the federal level have been plagued by partisan infighting, but the new administration in the White House coming in 2021, a much more generally accepting public opinion and the prospects of shutting down the black markets while padding strained state tax coffers is beginning to make federal legalization look truly inevitable.
The pace of change we see in the coming months and years will likely be rapid. After a period of significant disappointments, many marijuana companies have seen large percentage gains lately. Federal legalization will bring us the opportunity to own the shares of many more exchange-listed companies with the potential to reap big rewards from regulated, legal markets.
How Can You Profit from the Politics of Pot?
Future legislation about the legal status of marijuana in the US will almost certainly have a profound impact on the fortunes of the companies in the industry and on the returns of investors.
Investing responsibly in the marijuana space will involve staying abreast of pending developments in legalization - from what’s going to be included in referendums on state ballots, all the way to what’s happening on the floors of Congress and the Oval Office.
Those who see the potential in this nascent industry would be wise to pay close attention to the politics of pot as they make their investment decisions. Some of the early big gains (and losses) may well be due as much to the results of the political process as to the individual efforts of the companies involved.
Catching Medical Cannabis Opportunities Early
At Zacks we're monitoring political developments very closely as well as tracking individual stocks.
This space looks to EXPLODE from $17.7 billion in 2019 to $73.6 billion by 2027.¹ Yet only a few growers, pharmaceuticals, financial firms, suppliers - both established and start-ups - are the true innovators and offer exceptional profit potential.
So if you don't want to devote the constant attention and painstaking analysis to find these often little-known tickers, we can find them for you.
You're invited to take part in the portfolio service I'm directing, Zacks Marijuana Innovators.
Our approach is aggressive but responsible and vigilant. Our recommendation board is flush with double and triple-digit gains, and I’m lining up more stocks with similar upsides. I’ll alert you what and when to buy and when to sell. I'll also brief you on breaking market news that directly affects your investments.
Now Is the Time to Get In
This is your chance to follow the live buys and sells inside Marijuana Innovators, but please note that the number of investors who take part will be restricted and the deadline is coming up fast.
The portfolio closes again to entry Sunday, December 6.
See Zacks' Marijuana Trades Now >>
Zacks Stock Strategist
David Borun is Zacks' Cannabis Stock Strategist. He applies 20 years of trading expertise and many months of concentrated industry study to the direction of our unique portfolio service, Zacks Marijuana Innovators.
¹ Grand View Research