Read This Before You Buy Any Marijuana Stocks

By Markets Fool.com


Image source: Pixabay.

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It may not rank up there next to Social Security or Medicare, but marijuana is getting itself a lot of coverage this election season -- and for good reason.

According to the latest national poll from Gallup, 58% of respondents would like to see marijuana legalized. This tied the previous high water mark for Gallup's poll, and it's more than 30 percentage points higher than public responses fielded in Gallup's poll during the mid-1990s. Medical marijuana has an even higher approval rating, with a CBS News survey in April of last year showing that 84% of respondents want to see marijuana approved as a treatment for certain ailments.

What you need to know before buying marijuana stocks
With growing momentum, you might be intrigued enough to consider investing in marijuana stocks. However, before you go and do that, here's a list of some pertinent things you ought to know first.


Image source: Flickr user Bryan Rosengrant.

1. Most marijuana businesses are losing money
Despite ArcView Market Research estimating that legal marijuana generated $5.4 billion in sales in the U.S. last year, the vast majority of publicly-traded marijuana businesses lost money. You might think that with growth in the industry exploding, losses would be irrelevant and overlooked by investors. However, all you need to do is take a peek at how clinical-stage, and money-losing, biotech stocks have been routed since the beginning of 2016 to understand that profitability and growth do matter over the long run.

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2. Most marijuana stocks trade on the pink sheets
In addition to most marijuana businesses losing money, the vast majority of marijuana stocks trade on the pink sheets, or over-the-counter exchanges as penny stocks. Regulations on OTC exchanges have improved substantially in recent years, but the reporting standards still aren't on par with what you'd find with a company listed on the NYSE, Nasdaq, or NYSEArca exchanges. What this means for you is that finding pertinent, accurate, and up-to-date financial information, such as cash on hand, debt, cash flow, and so on, could prove difficult with most marijuana stocks.

3. Marijuana businesses face two inherent disadvantages
Investors have to remember that even though legal marijuana is expanding at a rapid pace at the state level, the marijuana plant remains illegal at the federal level. As such, marijuana businesses face two major disadvantages compared to normal businesses.

Image source: Pixabay.

First, even though marijuana is illegal federally, the IRS still expects marijuana businesses to pay federal income taxes. Here's the kicker: marijuana businesses aren't able to take normal business deductions, such as rent, because they're selling a substance deemed illegalby the federal government. In other words, marijuana business are paying tax on gross profits rather than net profits. Ouch!

The other issue is that few financial institutions want to deal with marijuana businesses because the substance remains illegal at the federal level, and many banks fear federal prosecution further down the road. This often means no access to checking accounts or lines or credit, creating a security problem, and stymying the industry's expansion efforts.

4. The 2016 elections will hold a lot of weight
Potential investors in marijuana stocks should also understand that the 2016 elections could tell the tale of where marijuana heads next.

On one level, we have what could be about a dozen individual states voting on ballot initiatives to legalize medical, recreational, or medical and recreational marijuana. The more states that choose to legalize, the more pressure will likely be placed on Congress to take up marijuana's rescheduling at the federal level for a possible discussion.

Image source: Bernie Sanders.

Additionally, whoever becomes president could have a lot of sway when it comes to marijuana's future. Democratic presidential hopeful Bernie Sanders wants to legalize marijuana across the board, while Republican front-runner Donald Trump would prefer to legalize only medical marijuana for the time being. On the flipside, Republicans like John Kasich and Marco Rubio aren't in favor of legalizing marijuana save for rare compassionate use instances.

5. Congress is in no rush to discuss marijuana legislation
Marijuana's approval rating may be soaring, but Congress itself is in no rush to make a hasty decision on marijuana.

What's the hold up? Primarily, lawmakers are waiting on more studies to emerge that will encompass marijuana's long-term safety profile. Decades of research have gone into analyzing the dangers of marijuana, but only recently has the focus turned to marijuana's possible benefits. Until a more complete safety profile is present, lawmakers are perfectly comfortable sitting on their hands.

6. The growth potential is enormous, if certain things happen
Finally, if certain things fall the industry's way, such as a rescheduling by the federal government, marijuana's growth could soar. ArcView Market Research believes that even without legalization, marijuana can grow at a compound annual growth rate of 30% between 2016 and 2020, resulting in $22 billion in legal sales by 2020. If this were to happen, marijuana stocks would indeed be an intriguing investment.

Marijuana stocks could have a lot of potential if the cards fall their way. However, there are no guarantees that any changes will be made at the federal level any time soon, if ever. Until such changes are made, marijuana stocks as a whole remain risky for a multiplicity of reasons, including, but not limited to, potential lack of financial transparency on OTC exchanges, unfair taxation, and minimal access to basic banking solutions. In other words, I'd suggest steering clear of this industry until the federal laws that govern marijuana are changed.

The article Read This Before You Buy Any Marijuana Stocks originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.