Marijuana Stocks Are Doomed if Trump Reneges on His Pot Pledge

By Sean Williams Markets Fool.com

With some small exceptions over the past couple of years, marijuana's expansion has been practically unstoppable. In the November elections, eight of the nine states voting on cannabis initiatives and amendments favored legalizing medical or recreational pot (sorry, Arizonans), while two states, Ohio and Pennsylvania, also wound up legalizing medical cannabis entirely through the legislative process last year. By year's end, 28 states had legalized medical cannabis, while eight had legalized recreational weed.

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As weed has expanded, pardon the pun, like a weed, so has the public favorability toward the drug. A 2016 Gallup poll found 60% support for the nationwide legalization of marijuana, which compares quite favorably to just the 25% who felt the same way in 1995, the year before California became the first state to pass a Compassionate Use law for medical cannabis patients.

Image source: Getty Images.

According to cannabis research firm ArcView, North American legal pot sales grew by a staggering 34% in 2016 to $6.9 billion, with Colorado crossing the $1 billion legal sales mark just 10 months into the year. More legal sales should mean higher tax and licensing revenue for the states themselves, making it appear like a win-win for everyone.

However, marijuana's momentum could soon come to a grinding halt.

Trump may renege on his pot pledge

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A little more than one week ago, White House Press Secretary Sean Spicer offered rather disturbing commentary on what the federal government's role in marijuana enforcement might entail going forward. The following is what Spicer told reporters,courtesy of Vox.com:

There's two distinct issues here: medical marijuana and recreational marijuana. I think medical marijuana, I've said before, that the president understands the pain and suffering that many people go through, who are facing especially terminal diseases, and the comfort that some of these drugs, including medical marijuana, can bring to them. And that's one that Congress, through a rider in [2014], put an appropriations bill saying that the Department of Justice wouldn't be funded to go after those folks.

There's a big difference between that and recreational marijuana. And I think that when you see something like the opioid addiction crisis blossoming in so many states around this country, the last thing we should be doing is encouraging people. There's still a federal law that we need to abide by when it comes to recreational marijuana and other drugs of that nature.

Long story short, the key takeaway from Spicer's commentary is that we would likely see a step-up in the federal enforcement of recreational marijuana laws at the state level.

Image source: U.S. Department of Homeland Security, Flickr.

Mind you, there was nothing specific discussed as to what a step-up in enforcement actually means. The Obama administration kept a very safe distance on marijuana, allowing the states to completely regulate and control their industries. Spicer's comments suggest that the Trump administration could simply step up enforcement to keep pot out of the hands of minors, or that it could really ramp up enforcement and conduct raids in states that voted to legalize recreational weed. Another possibility is the Trump administration could put the kibosh on newly approved recreational weed states (California, Massachusetts, Maine, and Nevada) before they have a chance to get off the ground. We just don't know.

What's particularly disturbing about this commentary is that it would mean President Trump is breaking his pledge on pot. During his campaign, Trump sided 100% with the idea of legalizing medical marijuana, and he announced his intent to allow state rights to prevail when it came to recreational pot. Now in the Oval Office, Trump seems content allowing state's rights to prevail when it comes to medical cannabis but not with regard to recreational weed.

Further complicating matters, Attorney General Jeff Sessions was arguably the most ardent opponent of marijuana in the Senate. Though Sessions has placed his support behind President Trump, suggesting he'll follow whatever actions are recommended by the president, Sessions has also said that, "I won't commit to never enforcing federal law."

This is terrible news for marijuana stocks

While it's uplifting to see that the federal government has no intention of disrupting the medical marijuana market and blocking access of cannabis-based products to select patients, the possibility of more stringent federal enforcement on recreational pot could be irreparably damaging to most marijuana stocks, especially those involved in the retail side of the equation.

Image source; Getty Images.

To be clear, marijuana stocks are already facing a veritable uphill battle that seemingly has no end. For instance, they have little or no access to basic banking services, such as a checking account or line of credit, because financial institutions in the U.S. answer to the federal government. Any signs of aiding a marijuana company could be viewed as money laundering, which has coerced most banks and credit unions to keep their distance. Being forced to deal solely in cash is a growth impediment for pot businesses and a serious safety concern.

Marijuana businesses are also unable to take normal tax deductions since they're selling a federal illegal substance. With it seeming increasingly unlikely that Congress will alter marijuana's scheduling during Trump's tenure as president, this tax disadvantage will remain firmly in place.

What can now be added to the woes is a possible crackdown on recreational pot by the federal government, which would take away the fastest growth channel for marijuana and investors. Don't get me wrong: There are billions of legal sales to be made to qualifying patients. However, the real growth is on the recreational side of the equation. Without this growth, marijuana stocks would almost certainly be worth avoiding.

There may be one exception

The one exception to the rule might be cannabinoid-based drug developers, which fall firmly on the medical side the equation that the Trump administration appears willing to leave be. However, it's worth pointing out that just because medical pot stocks would be free to thrive doesn't mean they'll necessarily be profitable and/or sustainable anytime soon.

Image source: GW Pharmaceuticals.

GW Pharmaceuticals (NASDAQ: GWPH) is the biggest of the bunch with a valuation already north of $3 billion. This lofty price comes after its success in pivotal phase 3 trials with experimental drug Epidiolex in treating two rare types of childhood-onset epilepsy. With approval of Epidiolex probably looking better than 50-50 after its phase 3 results, GW Pharmaceuticals has an outside chance at generating recurring profits by the end of the decade.

Another company that could be worth monitoring is Corbus Pharmaceuticals (NASDAQ: CRBP). The allure and danger of Corbus' pipeline is that it's entirely made up of one experimental anti-inflammatory drug, Resunab, which works with the natural cannabinoid receptors found in our bodies to strengthen the immune system while fighting inflammation typically associated with infection or injury. The company has four ongoing clinical-stage trials, a few of which could lead to instant profitability if Resunab is successful.

Nonetheless, Spicer's comments suggest that the Trump administration's dealings with marijuana will be a departure from Obama's hands-off approach. Even though we don't know all of the details yet, signs don't point to good news for the pot industry or marijuana stocks in general.

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Sean Williams has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.