Several of the largest marijuana stocks have seen their share prices more than triple over the past 12 months. Some have even quadrupled in value -- or come very close to doing so.
But can the great marijuana stock boom of the last year or two continue? There's plenty of uncertainty about what might happen with enforcement of U.S. federal marijuana laws. However, marijuana stocks could keep going up for a while to come. Here are three charts that show why.
Image source: Getty Images.
1. Public support
The single most important driving factor behind soaring marijuana stock prices is the growing support for legalization. This chart underscores just how quickly support for marijuana legalization has grown.
Data source: Gallup. Chart by author.
The increase in support for marijuana legalization in the 21st century has been dramatic. Why? The Pew Research Center, which has reported similar survey results on support for marijuana legalization as Gallup, found that a key catalyst was higher support among Americans born between 1981 and 1997, the "Millennial generation."
All millennials are now eligible to vote. As more of them exercise that right, it seems likely that there will be increasing social acceptance of legalized marijuana.
2. Legalization
Increased public support has led to legalization in quite a few states. There has especially been a surge in legalization over the past five years.
Data source: National Conference of State Legislatures. Chart by author.
Canada legalized medical marijuana on a national basis in 2001. In 2013, its government passed additional legislation that increased opportunities for licensed commercial marijuana growers. Canada expects to legalize recreational use of marijuana by the middle of 2018, a move that should only add fuel to the fire for support of legalization in the U.S.
While there has always been a black market for marijuana, legalization has opened doors for legitimate companies to enter the marijuana market. That's especially the case in states like California and Colorado, which have legalized recreational use of marijuana.
3. Limited investing opportunities
Many companies have entered the market for marijuana and marijuana-related products. However, relatively few of them have gone public. Those that have tend to have very small market caps.
Data sources: MarijuanaStocks.com, Yahoo! Finance. Chart by author.
Several of the largest marijuana stocks are biotechs engaged in the development of cannabinoid drugs. GW Pharmaceuticals (GWPH), for example, has a market cap of close to $3 billion because of high expectations of Epidiolex, its cannabidiol drug for treating epilepsy.
However, there are some marijuana growers in the mix of these relatively larger companies. Canadian marijuana supplier Canopy Growth Corporation (CGC 20.65%) claims a market cap of $1.2 billion.
There aren't that many marijuana stocks to choose from, though. Most are penny stocks, which come with significant risks for investors.
The law of supply and demand
So why do these three charts show that the marijuana stock boom could continue? The charts point to the laws of supply and demand. Prices go up when demand rises and supply is low.
Increased public support for marijuana legalization has already resulted in more than half of the states in the U.S. and the nation of Canada changing their laws. As support continues to grow, which seems likely, expect more states to legalize marijuana and more pressure on representatives in Washington, D.C., to relax federal laws prohibiting marijuana. These forces will drive demand higher as more markets open up.
Although it seems a virtual certainty that more marijuana-related companies will go public, there will still be relatively few high-quality stocks. The stocks of larger companies with greater financial resources will be most attractive to investors, with their share prices likely going up even more.
At some point, of course, reality will set in. Valuations can only go so high above what companies are actually worth before stock prices fall. A marijuana stock bubble and bust is probably on the way, but for the near term, the current marijuana stock boom should keep going.
