Forget the United States -- This Country Could Easily Represent Marijuana's Biggest Opportunity

Image source: Getty Images. 

Put plainly, you'd struggle as an investor to find a faster growing industry than marijuana.

According to ArcView Market Research, a cannabis research firm, legal marijuana sales in the U.S. totaled $5.4 billion in 2015 and could grow at a compound annual rate of 30% through 2020. This growth comes after Ohio became the 25th state to legalize the use of medical marijuana earlier this month. Meanwhile, four states -- Oregon, Washington, Colorado, and Alaska -- have legalized the sale of recreational marijuana since 2012.

Patient access to medical marijuana is really starting to blossom, and drug developers are getting in on the act by researching cannabinoids designed to interact with the cannabinoid receptor system located within our bodies. GW Pharmaceuticals' (GWPH) Epidiolex is a great example. In a phase 3 study reported in March, GW Pharmaceuticals announced that Epidiolex had reduced monthly seizure frequency in 39% of patients with Dravet syndrome, a childhood-onset form of epilepsy, compared to just 13% for the placebo. Epidiolex, along with traditional forms of medical cannabis, could offer new pathways of treatment for sick patients.

Within the U.S., the legalization of medical and recreational marijuana at the state level has also been a boon for state lawmakers looking to raise tax revenue without angering their constituents. Excise taxes on marijuana solely affect growers, processors, and retailers, as well as cannabis consumers. The result, in many states, has been extra revenue for education, law enforcement, and other programs.

Image source: White House on Flickr.

Inaction on Capitol Hill stymies U.S. growth

But the U.S. cannabis market is also a nightmare for investors because of the federal government and its unwavering stance on marijuana as a schedule 1 drug. Despite allowing states the opportunity to regulate their own marijuana industries, Capitol Hill hasn't been in any hurry to reconsider its current illicit classification.

Federal lawmakers sitting on their hands are causing two big issues for the marijuana industry. First, marijuana businesses must pay tax on their gross profits instead of net profits.

The second issue is that only around 3% of the approximately 6,700 national banks are willing to do business with the cannabis industry. Without access to lines of credit or even checking accounts, the marijuana industry is stuck dealing predominantly with cash.

Image source: Prime Minister of Canada, Justin Trudeau. 

Prime Minister Trudeau lays out the case for cannabis in Canada

However, if we look to our neighbor to the North, Canada, we see a country that could be on the precipice of becoming the most profitable market for cannabis in the world.

Current Canadian Prime Minister Justin Trudeau had campaigned on a platform that vowed to legalize, regulate, and restrict access to marijuana. Last week, Trudeau laid out his case to Canadian lawmakers, citizens, and perhaps even lawmakers beyond the borders of Canada for why legalizing recreational marijuana would make a lot of sense. And what's most interesting is that Trudeau's reasoning had very little to do with the taxable revenue that could be generated from a legal cannabis industry.

Courtesy of The Washington Post, here's what Trudeau had to say at a recent Canadian economic conference:

"Look, our approach on legalizing marijuana is not about creating a boutique industry or bringing in tax revenue, it's based on two very simple principles:

The first one is, young people have easier access to cannabis now, in Canada, than they do in just about any other countries in the world. [Of] 29 different countries studied by the U.N., Canada was number one in terms of underage access to marijuana. And whatever you might think or studies seen about cannabis being less harmful than alcohol or even cigarettes, the fact is it is bad for the developing brain and we need to make sure that it's harder for underage Canadians to access marijuana. And that will happen under a controlled and regulated regime.

The other piece of it is there are billions upon billions of dollars flowing into the pockets of organized crime, street gangs and gun-runners, because of the illicit marijuana trade, and if we can get that out of the criminal elements and into a more regulated fashion we will reduce the amount of criminal activity that's profiting from those, and that has offshoots into so many other criminal activities.

I have no doubt that Canadians and entrepreneurs will be tremendously innovative in finding ways to create positive economic benefits from the legalization and control of marijuana, but our focus is on protecting kids and protecting our streets." 

Preaching to the regulatory side of the equation instead of focusing solely on the taxable revenue to be generated could be the catalyst Trudeau needs to sway Liberal Party politicians to seriously consider legalizing recreational marijuana throughout Canada. We've heard similar arguments against legalization in the U.S. due to the potential for adolescent cannabis access, but Trudeau argues that legalization would only increase regulation within the industry to ensure that marijuana doesn't fall into the hands of adolescents.

If you're curious what the economics are behind a prospective legalization in Canada, a report from CIBC World Markets suggests it could be worth as much as $10 billion. Note that that's well below the peak estimates in the U.S. of around $35 billion in market value when legalized -- but with a possible legalization on the horizon in Canada and the U.S. government still sitting on its hands, Canada could vault into the spotlight as the marijuana industry's biggest opportunity.

Image source: National Drug and Alcohol Research Centre.

A blunt reality

However, before you get too excited, keep in mind that Canada is also not a lock to legalize marijuana.

Trudeau's campaign promise failed to highlight the struggles the Canadian government will likely endure if it attempts to legalize marijuana across the country. There are three international treaties that Canada is a part of that label the possession and production of marijuana as a "criminal activity," meaning lawmakers in Canada would need to find a way to legalize the drug without violating its treaties. This would require Canada to walk a very fine line with regulating its cannabis industry and appeasing its treaty partners.

Additionally, as reported by Newsweek, support for legalization hasn't really gotten off the ground at the provincial level in Canada. Whereas we've witnessed half of all U.S. states legalize medical marijuana, and up to a dozen states could be placing marijuana initiatives on the ballot for the Nov. 2016 elections, Canada's provinces have made little effort to get legalization efforts off the ground.

In effect, the Canadian government is interested in legalization, but appears restricted by existing treaties, whereas the U.S. federal government could change the existing laws, but has no interest in legalization for the time being.

The blunt reality for investors is that marijuana remains a risky investment that's best left untouched. It's always possible the Canadian or U.S. government could legalize marijuana, which would certainly change the outlook and investment nature of the industry. But until that happens, the risks will likely outweigh the rewards.