The marijuana industry is blossoming, and 2016 could wind up being its best year yet in a number of ways.
Marijuana keeps expanding despite federal inaction
Since California first approved Proposition 215 in 1996 to provide certain patients with medical marijuana on the basis of compassionate use, the marijuana industry has been trudging forward. Today, two dozen states have approved medical marijuana, while another four, along with Washington, D.C., have legalized the use of marijuana for recreational purposes.
State-level marijuana is yielding some incredible sales figures. According to cannabis research firm ArcView Market Research, legal cannabis sales totaled $5.4 billion in 2015, they're expected to hit $6.7 billion this year, and they could well hit nearly $22 billion by 2020 based on a projection that sees the marijuana industry growing at a compounded annual rate of 30%.
Colorado, for example, sold more than $1 billion in legal marijuana (medical and recreational) over the trailing 12-month period ending in February. In 2015, legal sales and licensing fees allowed the state to collect $135 million in tax revenue, some of which is being funneled back into education, law enforcement, and drug abuse programs. These are the types of figures that select state legislatures can easily get behind, and they're a big reason why roughly 12 states could vote on marijuana initiatives this November.
Yet despite marijuana's steady march forward, Congress and President Obama have proven to be a brick wall for industry advancement at the federal level. To be clear, the federal government is allowing states to govern their own marijuana industries without intrusion, but it has not begun to discuss the rescheduling or legalization of marijuana.
The contention all along has been that once regulators get an all-encompassing view of marijuana's safety profile, they'll be in a position to decide whether to reschedule or legalize the drug. Until such time as regulators have this safety profile in hand, marijuana is likely to remain an illicit drug.
This 20-year marijuana study could be a catalyst for change
However, earlier this month a team of 10 researchers from New Zealand, the University of California, Davis, Duke University, Arizona State University, and King's College London, published a 20-year study in JAMA Psychiatry that examined the effect of cannabis on about a dozen common health measures, including lung function, blood pressure, body mass index, and waist circumference.
For the study, researchers requested that a group of 1,037 adults born in Dunedin, New Zealand self-report their physical health figures, as well as their frequency of cannabis use. Researchers also obtained lab results for health factors such as lung function, systemic inflammation, metabolic health, and periodontal health. These figures were collected at ages 18, 21, 26, 32, and 38, with the study managing to retain 95% of all participants.
After controlling for a number of factors, including tobacco use, childhood health, and childhood socioeconomic status, researchers' 20-year study came to an interesting conclusion -- namely, that marijuana use only had a statistically significant adverse impact on periodontal health. In other words, marijuana had no negative impact on a dozen other health factors, including lung function, systemic inflammation, BMI, or metabolic health. Comparatively, tobacco use was, unsurprisingly, "associated with worse lung function, systemic inflammation, and metabolic health at age 38 years, as well as within-individual decline in health from ages 26 to 38 years," per the abstract.
If periodontal disease is the worst that regulators have to worry about, then this long-term study could be a catalyst for federal action on marijuana.
Expansion doesn't guarantee investing success
The keyword there is "If," because even given this favorable long-term analysis and the growing number of states legalizing marijuana for medicinal or recreational use, there's no guarantee that Congress will take up marijuana legislation anytime soon.
President Obama has suggested that marijuana is not on his agenda in his final year in the Oval Office, and Hillary Clinton, the likely Democratic nominee, hasn't exactly been enthusiastic about altering the current federal stance on marijuana. Clinton has reiterated that she'd prefer to wait and see what the long-term effects of the drug are. Presumptive Republican nominee Donald Trump appears open to the idea of legalizing medical marijuana at the federal level, but says he would need the agreement of Congress, which may not be likely.
The problem for investors looking to get in on marijuana's incredible growth rate -- which easily exceeds that of nearly all other industries -- is that the federal government's current stance on marijuana isn't very friendly. Yes, the federal government is letting states regulate their own industries, but keeping the drug illegal on the federal level leaves two huge disadvantages for the industry firmly in place.
First, U.S. tax code 280E disallows businesses that sell an illegal substance from taking normal tax deductions. Since marijuana is considered illicit, it falls under this category. Thus marijuana businesses are paying federal income tax on their gross profits, rather than their net profits. In plainer terms, marijuana businesses are being brutally overtaxed.
The other major issue for marijuana companies is that most banks want nothing to do with them, because banks fear the potential of federal prosecution down the road. Just 3% of the 6,700 national banks are currently working with marijuana-based businesses. Without access to basic banking services like a checking account or line of credit, businesses may struggle to expand. Security also becomes a major concern, as these businesses are forced to deal in cash.
So, even though the marijuana industry has a seemingly bright future, it doesn't look investment-worthy yet. My suggestion is to take Hillary Clinton's lead on this one and wait to see if the federal government changes its stance on marijuana. Until it does, marijuana is probably an off-limits investment.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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