The marijuana industry can accurately be described as growing like a weed, and investors are really beginning to take notice.
According to a recently released report from Marijuana Business Daily, the Marijuana Business Factbook 2017, U.S. weed sales are expected to grow by 45% in 2018 from a forecasted $5.1 billion to $6.1 billion this year, and effectively triple to more than $17 billion by 2021. This jives with a forecast offered by Cowen & Co. last year that suggested legal pot sales could hit $50 billion by 2026. Mind you, another research firm, ArcView, shows that $46.4 billion of the $53.5 billion in North American weed sales last year were conducted under the table, so there's a still a major opportunity for legal businesses to sway under-the-table consumers to the legal side of the equation.
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However, in order for that to happen we'd need to see a continuous flow of legalizations in the North American market. Canada's government is currently reviewing a bill that would legalize recreational marijuana throughout the country by the summer of 2018. Likewise, Mexico is considering the legalization of medical marijuana.
But in America things have moved a bit slower. Since 1996, 28 states have legalized the sale of medical cannabis, while eight have approved the sale of recreational weed since 2012. Make no mistake about it, recreational marijuana has far greater sales potential.
Vermont's bid to become the ninth legal recreational weed state goes up in smoke
Recently, Vermont's state legislature aimed to do something that no other state had done before: it vied to become the first state to legalize recreational weed entirely through the legislative process. By a vote of 79-66 in Vermont's House and 20-9 in the Senate, lawmakers in the state favored a recreational cannabis bill that would have allowed adults aged 21 and up to possess up to an ounce of weed, and up to two whole marijuana plants, or four immature plants, within their residence. Vermont's neighboring states of Massachusetts and Maine both passed recreational pot bills during the November elections.
Yet that bill is all for naught for the time being, with Gov. Phil Scott (R-Vt.) vetoing it and requesting that Vermont's lawmakers make additional changes before he'd consider signing it into law.
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Scott has previously stated that he doesn't oppose legalizing recreational pot on moral grounds, but has opined that certain safety regulations need to be in place before he'd consider signing a recreational pot bill into law. Scott specifically noted in his vetoing of Vermont's legislative attempt to pass a recreational marijuana bill that it didn't go far enough to punish drivers caught while driving under the influence, or do enough to keep weed away from children. Scott also called for an expanded committee that would include representatives from the Vermont departments of Public Safety, Health, and Taxes, along with substance abuse prevention, should this bill be signed into law. The bill Scott vetoed called for just a nine-member committee to discuss regulation and taxation.
The first point, being tougher with those caught driving under the influence of marijuana, could be especially tough given a lack of accurate equipment to measure impairment of drivers caused by marijuana use.
Marijuana stock investors are denied
If Gov. Scott's veto has demonstrated anything to marijuana stock investors, it's that nothing is a given with weed, even if the polls suggest there's clear support for legalizing it nationally.
To begin with, the federal government still lists cannabis as a schedule I substance, meaning it's illegal and has no recognized medical benefits. This categorization leads to a number of disadvantages for the pot industry, including the inability to take normal tax deductions since these businesses are selling an illicit substance, and the potential inability to secure basic banking services. Since most banks report to the Federal Deposit Insurance Corporation, a federally created entity, they could be found liable for money laundering if they even offer checking accounts to weed-based businesses under a strict interpretation of federal law.
Another primary issue with investing in marijuana stocks is that most companies aren't exactly primed to succeed. The space is currently dominated by smaller players, and funding is still a concern for the reasons noted above.
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For those companies that are large enough to succeed, losses and premium valuations should serve to scare away investors. Two examples are GW Pharmaceuticals (GWPH) and AXIM Biotechnologies (AXIM -3.23%), both of which are losing large sums of money at the moment.
If there is a positive for GW Pharmaceuticals, it's that the company's lead cannabinoid-based drug, Epidiolex, wowed in phase 3 trials for two rare forms of childhood-onset epilepsy, and at least has a path to approval. Nonetheless, its valuation seemingly implies that Epidiolex will hit $1 billion in annual sales before it's even approved.
AXIM is a completely different story. Though it has a bountiful pipeline of chewable and absorbable cannabis-based products, it's not expected to have any substantive revenue before 2020, and it had very little cash on its balance sheet ($0.7 million) as of the end of 2016. This doesn't look to be anywhere near enough capital to run its more than one-dozen early stage studies, which leaves AXIM in a cash bind.
Astronomical valuations are also a problem throughout much of the weed industry.
Even though marijuana stocks may appear intriguing due to changing public opinion and rapid legal sales growth, your place should be on the sidelines until we see a definitive change from Capitol Hill on scheduling.
