The good times just keep on rolling for the marijuana industry.
Heading into Election Day, half of the country had already legalized medical marijuana, while four states (Washington, Colorado, Oregon, and Alaska), along with Washington, D.C., had legalized the purchase of recreational pot for adults ages 21 and up. The rapid expansion of marijuana approvals in recent years can be attributed to a major shift in public opinion toward weed. In the mid-1990s, just a quarter of respondents in Gallup's annual poll wanted to see marijuana legalized nationally. Today, that figure stands at 60%, an all-time high. By a similar token, 84% of Americans in a 2015 CBS News poll said they'd like to see medical cannabis legalized nationally.
This changing opinion of cannabis has led to a "green revolution" -- and some very rapid growth rates for the industry. ArcView Market Research anticipates growth of 30% per year through the end of the decade for the legal pot industry, while investment company Cowen & Co. recently released a report that suggests legal marijuana could explode from a $6 billion industry today to a $50 billion industry by 2026. This works out to a compound annual growth rate of nearly 24%.
In order for these growth rates to become a reality, a majority of the nine marijuana initiatives and amendments being voted on this year had to pass -- and that's exactly what happened on Election Day.
Here's how cannabis fared on Election Day
The only initiative to fail was Arizona's Prop 205, which seemed like a long shot to pass anyhow in a traditionally Republican state. Still, the recreational marijuana measure only failed to pass by 2%, meaning a few years from now Arizonans could have legal weed in their state. The remainder of the initiatives mostly passed with ease.
For recreational marijuana:
- California's Prop 64 won approval with 56% of the vote.
- Massachusetts' Question 4 passed with 54% of the vote.
- Nevada's Question 2 legalized recreational pot with 55% of the vote.
- Maine's Question 1 squeaked by with 50.2% of the vote, a 2,600-vote margin.
For medical marijuana:
- Florida's Amendment 2 received 71% of the vote, more than the required 60% to change the state's constitution.
- North Dakota's Measure 5 won in a landslide with 64% of the vote.
- Arkansas's Issue 6 erased a previous defeat in 2012 and won with 53% of the vote.
- Montana's Initiative 182 passed with 58% of the vote, thus repealing constraints put in place by Senate Bill 423 on the state's medical marijuana industry.
It was very close to being a clean sweep for weed. The marijuana movement continues to gather steam, with 28 states now having legalized medical marijuana and eight having legalized recreational marijuana.
Here's where marijuana is currently legal, courtesy of Statista.
Image source: Statista.
Marijuana marches on, but investors are still being left behind
The fact that eight out of nine states wound up passing the marijuana initiatives or amendments is great news for the industry and suggestive that growth will continue. However, these approvals haven't changed the outlook for investors one iota. They're still largely on the outside looking in.
Even with so many states now looking "green," marijuana remains an illicit schedule 1 substance at the federal level, which comes with some inherent disadvantages for the businesses themselves.
For example, cannabis companies are still largely struggling to get basic financial services ranging from a line of credit to a simple checking account. At last check, just 3% of the roughly 6,700 banks in the U.S. were willing to work with marijuana companies. Despite some states have workarounds in place, these financial institutions fear the potential for federal prosecution down the road since they're insured by the FDIC and marijuana remains illegal federally. This essentially means most pot companies are being forced to deal with cash, which is a security risk and an expansionary inhibitor.
Corporate income taxes are another big issue for pot businesses. Practically every company in the U.S. is allowed to take normal business deductions -- but not marijuana companies. Because they sell a federally illicit substance, U.S. Tax Code 280E prohibits them from taking normal business deduction, leading to them paying tax on their gross profits instead of net profits. Having less money left over after taxes also constrains expansion.
Beyond these disadvantages, the cannabis industry is also stuck in somewhat of a catch-22. If marijuana remains federally illegal, then its expansion remains limited by state approvals. This is troublesome because there are about two dozen states that don't have access to the initiative and referendum process (I&R). The I&R process means it's up to state legislators to approve marijuana initiatives, and a number of the non-approved states are led by Republicans who, in general, don't favor marijuana's expansion. In other words, medical marijuana's expansion could be nearing a plateau, while recreational marijuana's expansion could slow down within a few years.
On the other hand, if marijuana is rescheduled and deemed to have medical benefits, it would place weed under the strict regulations of the Food and Drug Administration. The FDA can regulate marketing and packaging, would be expected to closely monitor the growing and processing of pot, and most importantly could require that costly clinical trials be run to confirm the medical benefits of marijuana. Long story short, the industry could be buried by costs and regulations.
Though marijuana's expansion has been an exciting thing to watch to the majority of Americans who support it, investors would be smart to stick to the sidelines and allow this industry to mature before they consider putting their hard-earned money to work. If they don't, their investment could go up in smoke.
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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