Though the U.S. stock market has been akin to a freight train over the past eight years, with virtually nothing getting in its way or slowing it down, it's marijuana stocks that have really had investors seeing green. A vast majority of pot stocks have doubled or tripled in value over the past year, and legal weed sales growth, along with the public's perception, are to thank for these solid gains.
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According to Marijuana Business Daily's newest report, "Marijuana Business Factbook 2017," legal weed sales growth in the U.S. is expected to grow by 45% in 2018, probably as a result of California's opening its doors to recreational pot sales as of Jan. 1. By 2021, the U.S. cannabis market could be generating as much as $17 billion in annual revenue, offering a big-time opportunity for investors to make money if this estimate is accurate.
In addition, the American public has spoken, and they overwhelmingly want to see marijuana legalized. Gallup, which has been tracking Americans' opinions on pot since 1969, found in October 2017 that almost two-thirds of respondents favored legalizing weed. Comparatively, just 25% felt the same way in 1995, the year before California became the first state to green-light medical cannabis for compassionate use cases.
Since 1996, 29 states have legalized medical cannabis, and voters in eight states have OK'd the sale of adult-use marijuana.
Marijuana businesses face an uphill battle in the U.S.
Nevertheless, the cannabis industry faces an uphill battle in the United States. The federal government continues to classify pot as a Schedule I substance, meaning it's entirely illegal, has a high potential for abuse, and has no recognized medical benefits. This scheduling, which puts cannabis on par with LSD and heroin, also puts weed-based businesses at pretty substantial disadvantages.
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For instance, marijuana companies have very limited access to basic banking services, including something as simple as a checking account. Since financial institutions report to the Federal Deposit Insurance Corporation (FDIC), and the FDIC is a federally created entity, any banks that offer financial services to pot companies could be fined or criminally charged for money laundering.
Marijuana businesses also get the short end of the stick come tax time. U.S. tax code 280E disallows businesses that sell a federally illegal substance from taking normal corporate income-tax deductions. For profitable pot businesses, this could mean paying an effective tax rate of as much as 90%.
And, of course, don't forget the war on marijuana currently being waged by Attorney General Jeff Sessions. Earlier this month, Sessions announced that he and the Department of Justice would be rescinding the Cole memo, which is a loose set of rules that states needed to follow to keep the federal government from intervening. Its elimination allows state-level prosecutors the discretion to bring charges against marijuana businesses and/or persons.
Vermont is about to do something no state has ever done before
One additional challenge we can add to the list is that two dozen states don't have the initiative and referendum (I&R) process. In the 26 states that do, residents who feel strongly about an issue, and can mobilize to gather enough signatures, can often put an initiative or referendum to vote on a ballot in an upcoming election. In the 24 states without the I&R process, it's up to that state's legislature and governor to pass laws. In other words, even if people overwhelmingly favor the legalization of marijuana, very little can be done in the 24 non-I&R states unless the legislature steps up and makes changes.
Since 1996, we've seen a small handful of states that lack the I&R process move forward by legalizing medical cannabis. This happened in both Ohio and Pennsylvania in 2016, and most recently it happened in West Virginia last year, which became the aforementioned 29th medical weed-legal state. However, no state has passed a recreational marijuana law through the legislative process before -- until now.
On Jan. 4, Vermont's House passed House Bill 511, which would legalize the possession and limited cultivation of marijuana for recreational purposes. Just six days later, after a bit of debating, Vermont's Senate concurred and also passed H. 511. Finally, Gov. Phil Scott (R-Vt.) has pledged his support to the bill, meaning Vermont will become the first state to pass a recreational weed law entirely through the legislative process.
Under the terms of the bill, adults will be allowed to possess up to 1 ounce of marijuana, two mature cannabis plants, and four immature plants. The sale of recreational marijuana will still be illegal in Vermont, although it's expected that recreational sales may follow soon after, depending on a report from a study commission.
For those who may not recall, this approval bears even more significance, given that Scott vetoed a similar bill in May 2017. More specifically, Scott vetoed the previous iteration because he felt it didn't do enough to keep adolescents away from pot, or protect drivers on the roads from those who are under the influence of cannabis. The fact that these issues have been addressed in the new bill holds the door open that Democrats and Republicans can indeed work together on this issue in other battleground states.
A glimmer of hope for marijuana stocks
Perhaps even more important is that Vermont is paving the way for other states to follow suit. With Sessions removing the Cole memo, state-level expansion, along with growing support for weed among the public, might be the only chance the U.S. weed industry has of thriving and coercing changes from Congress.
For example, Canopy Growth Corp. (NASDAQOTH: TWMJF), the Canadian grower expected to have the most growing capacity in 2019, has stated that it plans to stay out of the U.S. market as a result of Sessions' rescinding the Cole memo. Canopy Growth has been clear about operating only in markets where cannabis is federally legal. Though it could be missing out on a lucrative market in the U.S., Canopy Growth should do be just fine given the expected legalization of recreational pot in Canada, coupled with export opportunities to European countries that have legalized medical cannabis.
Meanwhile, state-level expansion may have a positive material impact on Aphria (NASDAQOTH: APHQF), another major Canadian grower. Unlike Canopy Growth, which has vowed to stay out of the U.S. until weed's scheduling is altered, Aphria announced its plans to buy one of Florida's seven legal medical cannabis cultivators in April 2017. Though Florida is one of the 26 states that follows the I&R the process, marijuana laws in Florida require constitutional changes and thus need 60% of the vote to become law, rather than a simple majority. If Florida votes to legalize adult-use weed in the years to come, Aphria could be ahead of its Canadian competition in a volatile and uncertain U.S. marijuana market.
For the time being, though, all eyes should be focused on Capitol Hill as we await the next step from Jeff Sessions.
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