One of the Biggest Barriers for Marijuana Stocks (And What to Do About It)

U.S. Marijuana Legalization and Marijuana Stock Growth
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U.S. Marijuana Legalization and Marijuana Stock Growth

As investors, we all want to see our portfolios grow in value; that goes without saying. The difficult part, of course, is in what needs to happen to make that growth possible.

Profits, acquisitions, sales: all these often help spur shares toward gains. But the legal marijuana industry, being as new as it is, has a unique set of conditions that we need to see in order to cultivate marijuana stock growth. First and foremost among these is governments not getting in the way.

The thing that’s unique about marijuana is that it’s a drug that has been illegal and largely demonized for decades, and is only now finally being accepted as a legal recreational drug rather than a black-market good.

That transition, of course, is going to be laden with government oversight (as it should be). After all, we don’t want children getting their hands on marijuana, nor do we want to have unsafe drugs consumed by people.

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But there’s a careful balance that needs to be struck between appropriate government oversight and onerous, overbearing, and burdensome regulations that not only stifle business growth but also allows the black market to continue to exist.

First, the obvious problem: the black market.

While marijuana legalization in Canada was supposed to help curb illegal sales of weed, it hasn’t been nearly as successful as many hoped. Due to product shortages (caused by—you guessed it—regulation rather than by suppliers not being able to meet demand) and higher prices due to taxes and fees, the black market has continued to thrive despite the legally approved option being available.

We’re seeing more and more stats come in that back up this claim. California, for instance, only garnered $345.0 million in marijuana tax revenue in 2018, versus the projected $643.0 million. (Source: “Forecasts Hazy for State Marijuana Revenue,” Pew Research Center, August 19, 2019.)

This is in large part due to the state’s slow transition from illegal to legal pot, and due to the continued strength of the black market.

In fact, a study by Pew Research Center shows that the vast disparity in taxation from state to state when it comes to marijuana, as well as revealing the disparity in just how much marijuana tax revenue these states are bringing in.

We’re also seeing a massive disparity when it comes to marijuana pricing, again in part due to the specific regulatory burdens of each individual state.

Prices for pot on the East Coast vary widely, ranging from $2,000 a pound for flower, all the way up to $4,200. (Source: “Cultivators, MJ executives say Eastern US marijuana prices remain strong as industry grows steadily,” Marijuana Business Daily, August 19, 2019.)

With such an uneven playing field, wherein certain marijuana companies have the advantage due to their state’s laws—and the black market has an advantage on all legal marijuana businesses—what we need to do is work to level that playing field.

Now, I’m by no means in the “regulation is evil” camp. In fact, I consider myself to be pretty pro-regulation in many cases. But when it comes to marijuana, governments have largely overstepped what I deem to be the appropriate bounds.

In Canada, there were shortages across the country due to regulatory obstacles.

In the U.S., as seen above, there are a number of disparities and issues when it comes to the marijuana sector that are limiting its potential.

So what needs to happen? Simple: deregulate. Not completely and not forever, but lower tax burdens and lower the regulatory obstacles. Then we should see marijuana prices come down, legal sales go up, and the black market suffer. As an added bonus, marijuana company shares will likely rise in tandem with sales.

You already have an inherent competitive advantage in the legal market in that most people would prefer to not break the law. Getting retail prices on an even footing would go a long way toward shutting down the black market.

Once the legal market is dominant, governments will have free reign to boost taxes gradually and impose stricter regulations as it sees fit. But right now, the black market has so much infrastructure in place from years of being the only business in town that legal marijuana companies are struggling to compete.

And this issue is extremely important for one simple reason: U.S. marijuana legalization. Most of the Democratic presidential hopefuls have come out in full support of legalization.

Several of the front-runners, especially, have been forceful in their belief that marijuana ought to be legalized at the federal level.

Senator Bernie Sanders, one of the highest polling among the potential Democratic presidential nominees, tweeted as early as 2016 to this effect.

“Keeping marijuana in the same category as heroin is absurd,” he wrote. “The time is long overdue for us to remove the federal prohibition on marijuana.” (Source: “Twitter post,” Bernie Sanders, August 11, 2016.)

It’s a simple call to action, but one that no doubt carries weight across the country, where the majority of people support marijuana legalization.

That U.S. marijuana legalization is inevitable is obvious, but the sooner the better. And when the U.S. does legalize pot, that could go a long way toward setting the standard of what appropriate marijuana regulation looks like.

In that event, we could see marijuana stocks be boosted, the black market decline, and both investors and politicians grinning from ear to ear.

Analyst Take

The marijuana industry needs to have fair and appropriate regulations in place in order to protect people, but also in order for it to grow. If the regulations remain unwieldy, then it will serve to benefit the black market at the expense of legal pot companies.

An easy thing that investors can do (at least those living in the U.S. and Canada) is to lobby and support politicians who would seek to reduce the level of obstacles facing the marijuana industry, in the hope that legalization would not only boost pot stocks, but also reduce crime.

It’s a simple but powerful move that would benefit almost everyone (with the exception of illegal drug dealers.)