You'd honestly struggle right now to find an industry growing at a quicker, more consistent pace than legal marijuana. According to cannabis research firm ArcView, North American legal pot sales, inclusive of medical and recreational weed, soared to $6.9 billion in 2016, and they're on track to reach nearly $22 billion by 2021. We're talking about a 26% compound annual growth rate over five years.
But as ArcView's data has also shown, this growth may be sustainable well beyond 2021. Last year, $46.4 billion in North American cannabis sales was conducted on the black market, implying that pot businesses have a massive opportunity to sway these consumers to legal channels in the years to come.
Continue Reading Below
Consumers are also behind the charge forward. A poll released by Quinnipiac University in April found an overwhelming 94% of respondents want to see medical marijuana legalized in the U.S., while surveys from Gallup in 2016 and CBS News in April 2017 showed an all-time high percentage of respondents (60% and 61%, respectively) that want recreational pot legalized across the United States.
Marijuana stocks and businesses face a number of inherent disadvantages
Yet, as you're probably well aware, recreational marijuana is still bound from realizing its full potential in the U.S., mainly as a result of the federal government holding firm on its stance of pot being a Schedule 1 substance. Drugs with a Schedule 1 categorization, like LSD, heroin, and marijuana, have no recognized medical benefits and are wholly illegal. As long as weed remains a Schedule 1 substance, marijuana stocks will likely have a rough go of things, and recreational pot sales in the U.S. will be somewhat stymied.
Schedule 1 drugs have other well-known disadvantages as well. For example, the Internal Revenue Service disallows businesses that sell Schedule 1 substances from taking normal corporate income-tax deductions. This leaves cannabis businesses to pay tax on their gross profits as opposed to net profits.
Furthermore, access to banking for pot companies and marijuana stocks can be minimal at best. Financial institutions report to the Federal Deposit Insurance Corporation (FDIC). Since the FDIC is a federally created entity, and marijuana is a Schedule 1 substance at the federal level, banks fear being slapped with fines or criminal charges for money laundering under a strict interpretation of federal law. Thus, most weed businesses can't even open a checking account with a bank, forcing them to deal in cash, which is a major security concern and a growth inhibitor.
Three surprising impediments to recreational marijuana's success
However, there are other, potentially bigger issues that the recreational marijuana industry is contending with beyond just the drugs' Schedule 1 status in Washington. Here are three very large under-the-radar impediments that the recreational marijuana movement will need to hash out before there can be any chance of change on Capitol Hill.
1. Limiting minor access via the home-grow option
One of the bigger issues of contention with the legal marijuana movement, at least from the standpoint of lawmakers, is keeping the drug out of the hands of minors. There's a strong belief, and even scientific evidence, that the minds of teens can be adversely impacted by regular marijuana use. For example, a 2015 Northwestern University study in adolescents found that subjects who had used marijuana for a period of three years had a long-term memory score that was 18% worse than the adolescents who had not used marijuana before. Those who used the drug also had an oddly shaped hippocampus, which is the part of the brain responsible for long-term memory retention.
Now here's the issue: A home-grow option would be fully expected if recreational marijuana were to be legalized nationally, or even on a state-by-state basis. However, a home-grow option for households also gives teens considerably easier access to marijuana. Lawmakers would need to figure out whether a full legalization would entail a home-grow option, and if so, what sort of checks and balances would be put in place to keep weed out of the hands of adolescents.
2. Driving-while-under-the-influence guidelines
A second behind-the-scenes issue that the recreational marijuana industry is likely to contend with is the regulation of driving under the influence of cannabis. There's clear-cut evidence that using marijuana impacts a person's ability to drive -- that's not the contention here. The issue at hand is at what level of tetrahydrocannabinol (THC), the psychoactive component of cannabis, in a person's body is it no longer safe to drive?
When we look at alcohol consumption, we have a pretty clear line in the sand. Nationally, if you use a breathalyzer and blow in excess of 0.08% blood alcohol content, you're not fit to drive. Field sobriety tests conducted by a law enforcement officer can provide additional evidence to this. But when it comes to cannabis use, there are no official guidelines. There aren't even any approved breathalyzer tests yet to measure THC, though numerous tests are in development and/or being tested in the field. Furthermore, THC presents a unique challenge in that it remains present in the body for days, or even weeks, after use, making a blood test not all that accurate for drivers who've used the substance.
In order for recreational marijuana to be considered for a nationwide legalization, national use guidelines for those operating motor vehicles would need to be established. Additionally, we'd need to see approved diagnostic tests on the market for law enforcement to accurately measure THC levels and establish when the drug was last used by the driver.
3. Employer drug-testing guidelines
A final behind-the-scenes hurdle that the recreational marijuana industry is struggling with is employer-based drug testing guidelines. Some employers prefer to follow federal guidelines when testing for illicit substances, which means that a positive marijuana test can equate to not being hired for a job, or worse, being fired. This holds true in some cases even if you're a medical marijuana patient in a legal state. Employers have the right not to alter their drug-testing policies and to instead follow the Schedule 1 status established in Washington.
As was reported by the Los Angeles Times last year, companies in safety-sensitive industries are especially unwilling to allow their employees to use marijuana, or have THC in their system, while on the job. These include industries like construction and trucking, which require the operation of heavy machinery. On a more company-specific basis, Boeing (NYSE: BA), the nation's airplane manufacturing giant, has stated that it won't alter its drug-testing policies despite have a large base of employees in Washington, a state that has legalized recreational and medical weed.
The only way for the pot industry to leap over this hurdle is to change Capitol Hill's stance on cannabis, which is easier said than done.
The weed industry has plenty of inherent disadvantages, but these behind-the-scenes hurdles are just as big of an issue as the readily apparent challenges it faces. As I've opined for years now, while the industry has been growing quickly, investors' best bet remains on the sidelines and far away from marijuana stocks until these bigger issues are resolved.
10 stocks we like better than BoeingWhen 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, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Boeing 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