Investing in Marijuana Stocks
Mr. Market is going gaga over his newfound money-making idea. He’s investing in pot stocks ahead of marijuana legalization. There have been hits and misses but his bets have largely paid off well. Marijuana stocks have been some of the best performing investments this year.
But following Mr. Market is not always a good idea. Like any other investment idea, this one also comes with pitfalls.
Yes, it’s true. One day the sun shines bright on speculations of marijuana legalization. The next day, political statements of Trump aides bring dark clouds on the horizon. This uncertainty has added to the risk of weed stocks. And with greater risk have come greater rewards for many.
But here’s the bitter truth. Don’t hate me for saying it. Although eight U.S. states have legalized marijuana, we’re nowhere close to seeing a green light from the federal government any time soon.
There’s a strong reason for it.
“Good people don’t smoke marijuana.”
Nope. Not me. The U.S. attorney general is saying this. And it matters, because he holds the power to give pot lovers the final okay on weed.
It’s no secret that Trump’s appointed attorney general, Jeff Sessions, is building a wall to keep weed out of the country. He weighs marijuana—a seemingly harmless drug—with alcohol and heroin, which are known to have killed far too many. (Source: “Senators held a hearing to remind you that ‘good people don’t smoke marijuana’ (yes, really),” The Washington Post, April 5, 2016.)
To support his claim, he uses anecdotal evidence from Lady Gaga. “Lady Gaga said she was addicted to it and it is not harmless,” says Sessions.
Well, what do you know!
Sessions threw the bait and the markets took it. Just take a look at the price chart for some of the popular U.S. marijuana stocks going haywire in the last one year.
In case you’re new to marijuana investing, here’s a heads-up.
Companies like GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH), Insys Therapeutics Inc (NASDAQ:INSY), and Cara Therapeutics Inc (NASDAQ:CARA) are biotechnology companies with investments in medicinal marijuana, but none of them is a pure play. Medical Marijuana Inc (OTCMKTS:MJNA), on the contrary, is solely a marijuana-focused company.
Chart courtesy of StockCharts.com
These marijuana stocks have gained wide popularity in recent quarters, yet all of them remain risky bets. You need nerves of steel to withstand those dizzying ups and downs.
This brings us to the question; why is legalization so important for marijuana stock investors when tons of marijuana companies are already active in the U.S.?
Let me explain.
Seeing double-digit jumps in marijuana stocks, many speculators have moved into this space to make a quick buck.
But for marijuana stocks to prove their true worth over the long run, these marijuana companies must show profitability.
Now, the anti-marijuana drug policy is keeping them from doing so. There are two reasons why. First off, these marijuana companies can only make money if they are allowed to sell. If their product is banned, who’s going to buy it? Only daredevils and criminals.
Two, as long as marijuana stays illegal, these companies stay tax-disadvantaged. Yes, in this sorry state of affairs for marijuana companies is another little hitch.
Marijuana companies receive unfair tax treatment because the federal government doesn’t recognize their product as legal. These companies are taxed on their top line, not bottom line. This means their gross profits are taxed, instead of net profits, which is the norm for all other businesses. The result is obvious; their profitability gets hurt.
And yet, I’m seeing the glass half full for marijuana companies. That’s because individual states are moving towards legalization—albeit with baby steps, even as the federal government steps back. This creates local opportunities for marijuana companies to thrive.
States Where Marijuana Is Legal
Many believe that California laid the first stepping stone to marijuana’s legalization back in the 1990s. But California only allowed medicinal marijuana. It wasn’t until 2012 that marijuana truly became a legal drug.
Colorado was actually the first state to accept marijuana as legal. When I say “legal,” I mean both for its medical and recreational use. Today, eight U.S. states and the District have legalized marijuana.
That’s not all. Nearly 13 other states have decriminalized marijuana; which means the cops go easy on pot users in these states.
Decriminalization is not the same as legalization, yet it is one step farther from illegality. If you’re found in possession of small quantities of weed, you’re let off easy with either just a warning or a small penalty, like a minimal fine or very brief jail time.
And finally, 28 states in total, plus the District, accept medicinal marijuana as legal. You’ll be surprised to find out that legal marijuana sales in these states accounted for a whopping $6.7 billion last year. So it’s not all gloom and doom for marijuana companies.
States Considering to Legalize Marijuana
The good news is that many states are following in the footsteps of Colorado to fully legalize marijuana.
Rumor has it that Delaware and Rhode Island are probably the next two states to smoke legal weed as early as next year. True or not, here are the seven states highly likely to approve marijuana’s legal status as a recreational drug.
|New Jersey||New Mexico||Maryland|
It’s believed so because representatives in these states have indicated their interest in legalization. Some have even hinted that a legalization bill will be tabled this year.
With this, we are brought upon the final and most quintessential question.
Should Trump Legalize Marijuana?
The world “should” has more connotational repercussions than the word “could.” Because the effects of legalization will be far-reaching—on both the economy and the society. So I’m a fence-sitter on this topic.
But for Businessman-cum-President Trump to consider legalization, he must be provided with incentives.
Legalizing marijuana could be very profitable for the government. It makes sense for a businessman to take his cut than let the opportunity pass under the radar. All that tax money collected could be put to better use (like building walls, maybe?).
Secondly, legalizing the drug kills its black market. It takes money out of the hands of criminals and drug mafia and into the hands of government-controlled tax-paying businesses (thus creating more jobs?).
Finally, it cuts down on non-violent petty arrests. Youngsters will no longer have to carry a criminal record for being found in possession of a small amount of an ostensibly harmless drug. This will allow the cops to direct their focus on more important tasks (like catching illegal immigrants?).
On the contrary, legalization would inevitably increase use of the drug and widen the bracket of users. This, of course, scares opponents like Jeff Sessions.
For him, weed is “only slightly less awful” than heroin, although the comparison between the two could be unfair. Bear in mind that heroin overdose has killed far too many, while weed remains an innocent drug.
But Sessions is not alone in his abomination of weed. White House spokesperson Sean Spicer also put his foot down on the drug in February. His statement gave a massive blow to marijuana stocks. The market was told in loud and clear words to expect “greater enforcement” of federal laws on weed. Marijuana stocks tumbled in the aftermath. (Source: “Spicer: Feds could step up enforcement against marijuana use in states,” The Washington Post, February 23, 2017.)
With so much uncertainty, investing in marijuana stocks could be a very risky wager.
Bottom Line on Marijuana Stocks
Investing in marijuana stocks is no less than a rollercoaster ride that can scare the average investor out of his wits. There are steep rises and free falls. Plus, the Trump administration is subsidizing more speed bumps on the way.
Statements from Trump’s aides have put a big question mark on marijuana’s future as a legal drug in the U.S. I hate to sound pessimistic, but it’s true that federal-level legalization in the U.S. might still be decades away.
But that doesn’t mean individual states won’t go ahead with their plans. The reality is that the majority of American millennials are voting for pot legalization.
Let’s not forget that democracies run for and by the people. As times progress, so will our societies and governments.
Long story short; marijuana’s legalization is no more a matter of if, but when. And when it does, early investors of marijuana stocks will reap the maximum rewards.
So keep an eye out and don’t miss the boat on this one.