Marijuana Stocks: Opportunities and Threats

The widespread push to decriminalize marijuana for medicinal and recreational purposes has created one of the fastest-growing industries in the history of the United States. According to The ArcView Group, legalized marijuana posted an eye-popping 74% growth rate 2014, generating approximately $2.7 billion in sales. But that's still nothing compared with where the industry could go if the drug is legalized across all 50 states or at the federal level.

Source: Flickr user Mark.

A reported from GreenWave advisors, for instance, notes that the movement for full legalization could drive marijuana sales up to $35 billion by 2020, putting it on track to become a larger business than the NBA and NFLcombined. If you're keeping score at home, that translates into roughly an 88% annualized growth rate for the next five years running.

Before you try to jump on the marijuana bandwagon, however, there are some serious threats to the industry that are worth a deeper look. Moreover, the best investing opportunities may not come from the most obvious places, especially as the legal landscape continues to undergo a game-changing metamorphosis.

With this in mind, let's consider the biggest threats and opportunities in the legalized-marijuana space going forward.

The political landscape is a major unknownAlthough23 states and the District of Columbia have now enacted laws allowing marijuana to be used medicinally, and Colorado, Oregon, Washington, Alaska, and D.C. also allow it to be used for recreation, the drug remains illegal at the federal level. In fact, marijuana is listed as a Schedule I drug, meaning the federal government views it has havingno accepted medical use and a high potential for abuse.

Right now, there is a movement within both houses of Congress to make marijuana a states'-rights issue and to reclassify it as a Schedule II drug. Such legislation would immediately remove the threat of federal prosecution for marijuana-related business in states that have decriminalized pot and open the doors wider for medical research by U.S.-based institutions.

Source: Flickr via user Joe Crimmings Photography.

That said, the political side of things is still in turmoil over whether to legalize marijuana, as seen in the Obama administration's mixed responses toward the drug over the years. During his tenure,the Department of Justice has gone on record as saying it wouldn't enforce laws against the production and sale of marijuana at the state level. And his administration removed a major barrier to medical research on marijuana this month byeliminating the need to submit a separate proposal to the Public Health Service board, calling it redundant in light of the FDA's review process.

However, Obama hasn't touched the issue of marijuana's Schedule I status, a step the administration could take without consulting Congress. And the president has been quiet in regard to replying to a request from the Supreme Court to weigh in on ahigh-profile caseinvolving the flow of marijuana from Colorado into neighboring states such as Oklahoma and Nebraska, where the drug remains illegal. Put simply, Obama appears content to kick the can down the road to his successor. And that brings about a whole other level of uncertainty, as most presidential candidates have either outright said they're against legalization or have remained elusive on the subject.

The science isn't boding well for marijuana as a medicinal productOne of the major elements behind the marijuana-legalization movement has been the claim that the drug is an effective and safe treatment for a host of disorders such as cancer pain, appetite suppression in HIV patients, and spasticity associated with multiple sclerosis. But two peer-reviewed articles published this month in the The Journal of the American Medical Association poked some glaring holes in this hypothesis, calling the clinical evidence, so far, "weak" for most indications.

Perhaps more concerning is that some studies have found evidence that marijuana isn't nearly as "safe" as its advocates say. While regular marijuana use wasn't associated with an increased risk in lung or head and neck cancers, for example, three studies did find a link between pot and testicular cancer.

Like any drug intended for medical use, marijuana will have its risks weighed against any potential benefits. The issue is that marijuana, and its derivatives, haven't exactly blown the doors off in terms of providing a strong therapeutic signal in clinical trials.

The best opportunities in legal marijuana may lie in pedestrian, large-cap stocks that no one's looking at right nowThere's no doubt that medical-marijuana stocks such as GW Pharmaceuticalshave benefited greatly from the green-gold craze. GW's stock price, for instance, has appreciated by more than 1,200%, while its revenues have continually dropped, over the past few years:

This trend probably won't hold, though, if marijuana is effectively legalized at the federal level or made a states'-rights issue. Marijuana's Schedule I status has acted like a dam, protecting early pioneers into this emerging industry. But if that situation changes, we would likely see a flood of large-cap companies enter the game, potentially wiping out their predecessors altogether.

On the medical side, big pharma has barely touched marijuana because of the barriers to conducting the large, randomized clinical trials necessary to gain regulatory approval. Once that obstacle has been removed, there will almost certainly be an onslaught of major players that would initiate clinical trials. Pfizer, for example, is extremely interested in non-opioid pain meds. And companies of this size simply have far more resources than a company like GW Pharmaceuticals to pursue this line of research.

Turning to supply and distribution for the recreational use of marijuana, you have to think that names such as Philip Morris, CVS Health, and Rite Aid, just to name a few, would be keen to use their vast networks to crush would-be competitors, again if laws surrounding marijuana become more liberal.

Key takeawaysLegalized marijuana ia posting some stunning growth numbers right now, but investors are probably best served by remaining patient until the legal questions have been resolved once and for all. After all, the next president could put a damper on this social movement by vowing to keep the drug illegal at the federal level, or a new bill could essentially leave it up to the states to decide for themselves. There's no telling how this is going to play out, or who the ultimate winners and losers will be from this drive to decriminalize pot. All told, marijuana's awesome growth potential makes it a key industry to keep an eye on going forward, but the numerous threats to its long-term viability shouldn't be taken lightly.

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George Budwell has no position in any stocks mentioned. The Motley Fool recommends CVS Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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