If we take a step back and think about how far the marijuana industry, and marijuana stocks for that matter, have progressed over such a short period of time, it's quite impressive.
The marijuana industry and pot-stock investors are seeing green
In 1995, not a single state allowed physicians to legally prescribe cannabis for medical use. Today, 28 states, along with Washington, D.C., allow doctors to prescribe medical cannabis for select ailments that are determined specifically by each legal state. Last year alone, five states legalized medical weed, and a recent Quinnipiac University poll found that 93% of respondents support the idea of legalizing medical pot nationwide.
Image source: Getty Images.
As for recreational marijuana, not one state had legalized adult-use of the drug before the 2012 elections in November. Since then, however, residents in eight states have done so. The 2016 November elections saw four of five states pass respective recreational cannabis initiatives, with Arizona's measure narrowly falling short by 2%. A 2016 poll from Gallup and April 2017 poll from CBS News both showed support for recreational-marijuana legalization now at all-time highs of 60% and 61%, respectively.
This rapidly evolving public opinion on pot, as well as the 34% growth in legal North American weed sales in 2016, per ArcView, has been a driving force behind marijuana stocks. Many are up more than 100%, 200%, or even more, over the past 12 months.
Vermont is on the verge of doing something historic
Well, folks, marijuana stocks may have yet another reason to rejoice.
Last week, lawmakers in Vermont became the first state to use the legislative process to pass a bill that would legalize recreational cannabis. All previous states that have attempted to legalize recreational pot have brought a vote to their respective residents via a ballot initiative. Vermont, on the other hand, saw its House vote 79-66 in favor of a recreational-cannabis bill, which followed a 20-9 vote in favor from the Senate two weeks ago.
The bill now heads to the desk of Gov. Phil Scott (R-Vt.), where it's unclear if he'll sign the measure. Scott isn't morally opposed to legalizing recreational marijuana, and he's suggested in the past that he'd be willing to look at legalizing the drug. However, Scott has public-safety concerns about legalizing recreational weed and will want to ensure any legislation has its "I's" dotted and "T's" crossed. If signed, Vermont would become the ninth state to legalize adult-use pot.
Image source: Getty Images.
The push from Vermont's legislature makes sense, given both the progressive nature of politics within the state (progressive politicians have a more favorable view of weed in polls) and the fact that neighboring Maine and Massachusetts legalized recreational cannabis in the November 2016 elections. That meant Vermonters could essentially border-hop to purchase legal pot, with Vermont missing out on potentially lucrative tax and licensing revenue. Passing an adult-use bill would end this border-hopping incentive and possibly add to Vermont's annual revenue.
If approved, the Vermont bill would allow users ages 21 or higher to possess up to 1 ounce of marijuana and up to two whole marijuana plants, or four immature pot plants, within their residence. The bill would take effect by July 2018, if signed, though the exact tax structure isn't yet known. A nine-person commission would be created to draft a plan for the taxation and regulation of a legal weed industry in Vermont, which is to be submitted to the state's legislature for review.
More expansion equals more revenue opportunities for marijuana stocks
A potential approval in Vermont is particularly exciting, given what's going on with our neighbors to the north. In mid-April, Prime Minister Justin Trudeau introduced legislation that would legalize recreational weed in Canada by mid-year 2018. The prospect of this legalization, as well as steady growth in Canada's medical-cannabis market (medical pot has been legal in Canada since 2001), has coerced rapid capacity expansion for some of the industry's biggest players.
Image source: Getty Images.
For example, Canopy Growth Corp. (TWMJF +0.91%) has been expanding its capacity via acquisitions. Earlier this year it completed an acquisition of Mettrum Health, and it purchased a 472,000-square-foot property that currently houses the company's headquarters. In total, these acquisitions have given Canopy Growth access to about half of Canada's medical-pot patients, and, more importantly, 665,000 square feet of grow capacity.
Its competitors, Aurora Cannabis (ACBFF +0.30%) and Aphria (NASDAQOTH: APHQF), have mostly been growing via organic expansion. Aurora Cannabis is in the midst of a massive 800,000-square-foot expansion known as the Aurora Sky that it believes will be the largest and most automated cannabis grow farm in the world when completed. Aphria is working on a $100 million capital project that'll boost its growing capacity to 1 million square feet and add 75,000 kg of annual weed production.
Right now, all of three of these Canadian medical pot stocks are focused on their domestic market and eager to hear what comes of Trudeau's push to legalize adult-use weed. However, if expansion pushes forward in the U.S., and these growers can work out the ability to export their product to the U.S. (assuming growers in select U.S. states can't keep up with demand), they could see a major uptick in demand.
You'll still want to keep this in mind
However, no discussion of marijuana stocks is complete without also mentioning the mountain of risks they still face, even if Vermont legalizes the use of recreational pot.
To begin with, there's a lot of political risk, especially in the United States. The Trump administration has signaled a tougher stance on recreational weed than the Obama administration, which is only further enhanced by having Jeff Sessions, one of the most ardent opponents of weed while in the Senate, as the attorney general. If regulations tighten, it could be game over for marijuana stocks, at least in the U.S.
Image source: Donald J. Trump official Facebook page. Photo by Benjamin D. Applebaum.
A number of inherent disadvantages also plague the industry. For instance, businesses involved with cannabis are usually unable to receive basic banking services, such as a line of credit or even a checking account. Since most financial institutions report to the Federal Deposit Insurance Corporation (FDIC), and the FDIC is a federally created entity, they could be found liable for money laundering under a strict interpretation of federal law.
Marijuana businesses also have no ability to take normal business deductions, since they sell a federally illegal substance. That means they get stuck paying tax on their gross profit instead of net profit.
There are even fundamental risks. Most marijuana stocks are losing money, yet they often have nosebleed valuations.
Despite what looks to be promising legal sales growth, much still needs to happen before marijuana stocks can be considered a viable long-term investment opportunity.
