This Under-the-Radar Issue in Legal-Marijuana States Could Undermine Stocks and Growth

There are few, if any, industries that are growing at a quicker and more consistent pace than legal marijuana -- and we only need look at the performance of marijuana stocks over the past year to realize it. Over the trailing-12-month period, the average return of the largest one dozen pot stocks is more than 100%.

Marijuana has businesses and investors seeing green

A big change in the public's perception of cannabis has been behind this rise in marijuana stocks. In just over two decades, Gallup's national poll has shown that favorability toward legalizing weed nationally has grown from 25% to an all-time record of 60% as of 2016. With more people than ever wanting to see cannabis legalized, the belief is that pressure will grow on lawmakers in Washington to alter their scheduling of the drug.

Legal pot's expansion has also been just as impressive. In June, Mexican President Enrique Pena Nieto signed a bill into law that legalized medical cannabis throughout his country. Also, our neighbors to north are currently debating a bill introduced by Prime Minister Justin Trudeau that would legalize recreational marijuana by July 1, 2018. Should Canada move to legalize recreational weed, it would become only the second country to do so, after Uruguay. Within the U.S., 29 states have legalized medical cannabis since 1996, while voters have legalized recreational weed in eight states since November 2012.

The federal government remains a clear obstacle

Of course, the elephant in the room remains the U.S. federal government, which has dug in its heels and firmly stood by its Schedule I categorization of marijuana. Schedule I substances are defined as having no medical benefits, and they're entirely illegal. The Schedule I designation has made it exceptionally difficult for researchers to run clinical benefit-versus-risk studies on pot. Further, weed-based businesses have limited or no access to basic banking services, since they're selling a federally illegal substance, and most, if not all, can't take normal corporate income-tax deductions.

But this merely summarizes the well-known challenges the marijuana industry and investors face. There's another under-the-radar issue that's threatening cannabis' growth prospects, and that of marijuana stock investors.

Surprise! Here's an under-the-radar problem to consider

As the Los Angeles Times highlighted last week, a zoning amendment in Huntington Beach, Calif., is aiming to prohibit businesses from selling and distributing non-medical marijuana. The Planning Commission recently voted 6-1 in favor of adopting such an amendment, even though Californians voted overwhelming in November to legalize recreational marijuana via Proposition 64. The amendment would make the outdoor cultivation of recreational marijuana illegal, while indoor cultivation would be restricted to private residences in an enclosed area.

According to the Huntington Police Department, by way of the Los Angeles Times, "non-medical marijuana businesses and deliveries could have negative effects such as an increase in robberies, thefts, and burglaries." It also states that cities with non-medical-marijuana sales have seen an increase in arrests related to driving under the influence.

The key takeaway from the Huntington Beach proposal is that jurisdictions still have the ability in legal states to deny the option for recreational marijuana operators to open a business. Immediately following the legalization of recreational weed in Colorado, roughly three-quarters of its counties decided they wanted no part of the recreational-pot industry, leaving adults over age 21 to purchase legal marijuana in just a handful of counties. Thankfully for Colorado, and a number of other legal states, the most populous counties tend to be the most likely to allow dispensaries to do business. Nevertheless, uncooperative counties could make life difficult for the industry and marijuana-stock investors.

What it'll take for Capitol Hill to reschedule marijuana

The only way to end this Swiss-cheese legalization model, whereby jurisdictions would have the opportunity to resist the legalization of recreational marijuana in opposition to a passed proposition, is to alter marijuana's federal categorization.

One of the bigger issues there is Attorney General Jeff Sessions, who just might be the most ardent opponent of pot's expansion in the entire country. In May, Sessions sent a note to congressional leaders asking them to repeal the Rohrabacher-Farr Amendment, which disallows the use of federal dollars to prosecute weed businesses that are operating in legal states. In effect, Sessions wanted to trample states' rights and prosecute medical-marijuana businesses.

President Trump, while in favor of medical marijuana during his campaign, hasn't been that supportive of recreational marijuana. In fact, now-former White House press secretary Sean Spicer intimated in February that the current administration would be tougher, not more lax, on marijuana than the Obama administration was.

There's also significant red tape, as noted earlier, which makes it tough to run clinical studies on marijuana's benefits and risks. Lawmakers are unlikely to consider changing its scheduling without first seeing a thorough profile of its risks and benefits.

Perhaps the greatest hope for change lies with a future election. It's unclear if marijuana is a strong enough issue to oust incumbents from Congress, but a majority of Americans do now support legalizing the drug. Continuing to uphold its Schedule I categorization could mean some lawmakers lose their seat in the House or Senate.

In addition, Republicans are among two groups of people, along with senior citizens, who still have an unfavorable view of cannabis. It's possible that if there were fewer Republicans in Congress, changing marijuana's scheduling may be more probable than it is now.

Unfortunately for proponents, any chance of change is still probably years off. That means a continual uphill battle for the marijuana industry, and thus for marijuana stocks' ability to realize their full potential.

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