Unless you've been living under a rock, you're probably well aware of the blazing quick growth pace of the legal marijuana industry -- as well as why investors have been gravitating to marijuana stocks, many of which have more than doubled over the trailing 12-month period.
Continue Reading Below
Why investors have flocked to marijuana stocks
According to cannabis research firm ArcView, North American legal weed sales, including both recreational and medical pot, launched 34% higher in 2016, to $6.9 billion, and they're slated to grow to an estimated $21.6 billion by 2021. Considering that more than $46 billion in North American pot sales were conducted under the table last year, there's a perceived-to-be multiyear double-digit percentage growth opportunity still to come for the legal weed industry.
Growing favorability toward cannabis among the public has certainly helped. The percentage of respondents in Gallup's 2016 poll who wanted to see weed legalized nationally has more than doubled, to 60%, since the question was posed in 1995, the year before California became the first state to legalize medical cannabis for compassionate use.
Ongoing expansion also provides a means for investor excitement. Last month, President Enrique Pena Nieto legalized medical cannabis throughout Mexico, while our neighbors to the north are currently debating legislation introduced by Justin Trudeau that would legalize recreational marijuana by as early as July 1, 2018. We've also witnessed 28 states follow California's footsteps since 1996 and give the green light to medical pot, and residents in eight states OK'd recreational weed since Nov. 2012.
The question that consumers, investors, and proponents simply have is: Which state is next?
Continue Reading Below
Is Delaware next in line to legalize recreational marijuana?
One state that appears to be in the thick of discussion surrounding recreational marijuana is Delaware, which is aptly nicknamed the First State since it became the first state to ratify the U.S. constitution in December 1787. If proponents have their way, the First State could become the ninth state to legalize recreational pot by early 2018.
In March of this year, Sen. Margaret Rose Henry (D-DE) introduced legislation that would allow adults aged 21 and over to purchase marijuana, as well as give the state the right to tax the substance at the retail level. There was nothing specifically unique about the bill itself relative to what other legal states have previously introduced. However, what is unique about Delaware, as well as two dozen other states in the U.S., is that it's not an initiative and referendum (I&R) state. In other words, state residents don't get to vote on initiatives. Instead, Delaware is a state where laws are introduced and passed entirely at the Congressional level.
What makes Delaware's shot at passing recreational marijuana legislation so challenging, despite a purported 61% support from its residents, is that its House and Senate will require a two-thirds vote. In other words, Rose Henry's bill, or any marijuana legislation for that matter, is going to require bipartisan support. Gallup's 2016 weed survey showed that only two groups of people still oppose legalizing marijuana nationally: seniors and Republicans. Not surprisingly, the biggest source of opposition toward Rose Henry's bill has been state Republicans.
But not all hope is lost. A middle ground of sorts was recently reached whereby a marijuana task force, consisting of state government regulators, public safety officials, politicians, medical expects, advocates, and detractors, will be created. The task force is expected to report their findings to Delaware's Congress in Jan. 2018, when it reconvenes. If the outlook from the task force is positive, and there is indeed clear support from Delaware's residents, lawmakers in the state may have little choice but to move forward with the bill, or risk losing their seats in an upcoming election.
Only time will tell if Delaware has the votes to become the elusive ninth state to legalize recreational marijuana. Vermont failed earlier this year, with its governor vetoing a bill that made it to his desk.
I&R is an inhibitive process that really stymies legal expansion and marijuana stocks
Though investors and legalization advocates are probably excited about the progress being made in Delaware and other states across the country, this Fool can't help but point out just how inhibitive the I&R process could be for the industry's future growth prospects. Without the ability of state residents to coerce a ballot vote, it's left up to lawmakers in two dozen states to introduce marijuana legislation on behalf of consumers. In many of these I&R states, this probably isn't going to happen, despite growing support in favor of legalizing marijuana, as a whole.
For example, 21 states have yet to legalize medical marijuana. Most of the remaining states that haven't done so yet are either firmly controlled by Republican lawmakers, or there's a pretty even make-up in Congress between Republicans and Democrats that would suggest little chance of compromise on a marijuana bill.
Many of these 21 states also don't have the I&R process. Essentially, this means that, without a federal law changing marijuana's scheduling, expansion opportunities on the medical cannabis side of the equation have thinned out. Soon, the same may be said for recreational marijuana.
Put plainly, the I&R process is bad news for marijuana stocks that are counting on continued expansion in the U.S. to grow their sales. This, along with the fact that most marijuana stocks are still losing money, provides all the more reason why marijuana stocks should be left to speculators and kept out of long-term investors' portfolios for the time being.
10 stocks we like better than Wal-Mart
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Wal-Mart wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of July 6, 2017
The author(s) may have a position in any stocks mentioned.
The Motley Fool has a disclosure policy.