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3 Big Risks for Marijuana Stocks in 2017

By Keith Speights - Jan 22, 2017 at 11:41AM

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Marijuana stocks may be in for a bumpy ride this year.

Marijuana stocks are flying high right now. There's no reason to think that 2017 won't be yet another great year, right? Actually, some significant threats remain for the now-thriving marijuana industry. Here are three of the biggest risks for marijuana stocks this year.

Image source: Getty Images

1. Too much competition

Even a fast-growing market can only support so many companies. That's the case with pretty much any product, and the marijuana industry is no exception.

As more states have legalized marijuana use, more companies have sprung into existence. If too many companies jump on the marijuana bandwagon, though, some marijuana stocks that have skyrocketed in the past year could come back down to earth.

In the animal world, as food resources become less readily available, the animals best-equipped for survival thrive, while others die out. This is known as survival of the fittest -- and we could see it apply to marijuana stocks in the not-too-distant future. The limited resources of the market won't be able to support every new entrant.

Understand, though, that the stocks most affected by this will be those of companies that simply sell medical or recreational marijuana. Companies developing marijuana-based drugs that go through the U.S. Food and Drug Administration (FDA) regulatory process should be spared.

GW Pharmaceuticals ( GWPH ) is a good example. The company is moving forward with plans to seek FDA approval for Epidiolex for the treatment of Dravet syndrome and Lennox-Gastaut syndrome (LGS), two forms of epilepsy. GW Pharmaceuticals' fortunes are tied to winning regulatory approval and launching Epidiolex successfully. The flood of companies entering the broader marijuana market won't impact GW at all.  

2. Federal crackdown

While GW Pharmaceuticals and other biotechs developing cannabinoid drugs are following federal rules and regulations to gain approval for these candidates, most marijuana companies are technically operating in violation of federal laws. So far the federal government hasn't enforced those laws as states have legalized marijuana, but there is a risk that things could change.

U.S. Attorney General nominee Jeff Sessions, currently a Republican senator from Alabama, has been adamantly opposed to the legalization of marijuana in the past. In his recent confirmation hearings, Sessions said that he "won't commit to never enforcing federal law." He also stated that "it is not the Attorney General's job to decide what laws to enforce."

Attorney General nominee Sen. Jeff Sessions. Image source: Flickr user Ryan J. Reilly.

Those comments could open the door for a federal crackdown on the sale of marijuana. When Colorado and Washington legalized marijuana, the U.S. Department of Justice announced guidelines that allowed states leeway to enforce their own narcotics laws but expected them "to establish strict regulatory schemes" to protect federal laws. Sessions thinks those guidelines might not have been followed, and he could use this to reassert federal enforcement measures.

However, Sessions didn't take as hard of a line as he could have. President Trump has expressed support for legalized use of medical marijuana. It's not likely that Sessions, if approved as attorney general, will take a significantly different approach from his boss. On the other hand, there's still the possibility that the Justice Department could be much stricter than it has in the past few years -- and that could hurt some marijuana stocks.

3. Erosion in public support

With eight states now allowing recreational use of marijuana and 29 states legalizing medical marijuana, you might think the groundswell of support could lead even more states to follow their lead. However, there's a real risk that there will instead be an erosion in public support for marijuana use.

A recent study released by the National Academies of Sciences, Engineering, and Medicine casts significant doubt on many of the supposed benefits of marijuana use. This study, for example, found limited evidence that marijuana is effective for increasing appetite and decreasing weight loss associated with HIV/AIDS, for treating Tourette syndrome, for easing anxiety, and for treating post-traumatic stress disorder.

Even worse, the study found substantial evidence of a statistical link between smoking marijuana and serious respiratory symptoms. Compelling evidence was also found for a link between marijuana use and increased risk of motor vehicle crashes. Perhaps most troubling, the study reported substantial evidence linking marijuana use to the development of schizophrenia and other psychoses.

Expect opponents of marijuana to use this study in their efforts to keep more states from legalizing the drug. It's also possible that groups could use the study's findings to lobby for more federal enforcement. Regardless, these findings might dampen public support for the legalization of marijuana. That won't help marijuana stocks. 

Survival of the fittest

In the early days of the industry, nearly every marijuana stock was a winner. Things were bound to change sooner or later, though. 

Companies that are largely immune to these changes, like GW Pharmaceuticals, can not only survive but thrive. Others that can adapt effectively to increased competition and potential changes in federal policy, as well as potentially waning public support, could also perform well. Not every marijuana stock will keep on flying high in the midst of change -- but some will.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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