In recent years, growth in the marijuana industry has been phenomenal. In fact, you'd struggle to find an industry that could deliver comparable growth over an extended period of time, which is a prime reason why investors have flocked to marijuana stocks.
Last year in North America, according to cannabis research firm ArcView, net sales of cannabis were an estimated $53.3 billion. Of this amount, just $6.9 billion was conducted through legal channels. The remaining $46.4 billion stands as a pie-in-the-sky opportunity for the pot industry to attract new customers through legal means. This, along with record-high approval ratings for marijuana in Gallup's and CBS News' most recent polls, is what's pushed many marijuana stocks higher by at least 100% over the trailing 12-month period.
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Also noteworthy is the fact that our neighbors to the north and south could be readying to expand the use of legal marijuana. In Canada, where medical cannabis has been legal since 2001, Prime Minister Justin Trudeau introduced legislation that would make recreational weed legal for adult use by next summer. Meanwhile, legislation made it through Mexico's Congress that would legalize medical marijuana throughout the country.
Where's the U.S. while this is going on, you ask? Mostly stuck in neutral.
Federal scheduling of marijuana is holding the industry back
In terms of state-level legalizations, the U.S. has made marked progress in recent years. As of the end of 2016, more than half of all states (28) had legalized medical cannabis, and residents in eight states have voted to legalize recreational marijuana since Nov. 2012.
However, and this is the big "however," the federal stance on marijuana remains the same today as it's been for decades. Namely, cannabis is a schedule I substance, meaning it has no medical benefits and is entirely illegal -- the same as heroin or LSD. This stance was considered acceptable to many back in the 1990s when, according to Gallup, just a quarter of respondents wanted weed legalized nationally. With approximately three out of five survey-takers wanting to see pot legalized nationally today, Congress' view on marijuana isn't all that popular.
In fact, categorizing marijuana as a schedule I substance has some pretty adverse impacts on companies that operate legally within the industry.
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For example, most weed-based business have little to no access to basic banking services, ranging from obtaining a loan or line of credit to something as simple as getting a checking account. Since most financial institutions report to the Federal Deposit Insurance Corporation, a federally created entity, and the federal government lists cannabis as schedule I, any banking institutions that offers services to pot-based businesses could, under a strict interpretation of the law, be guilty of money laundering.
Furthermore, businesses involved in the marijuana industry face some pretty stiff tax disadvantages. IRS tax code 280E disallows businesses that sell federally illegal substances, like marijuana, from taking normal corporate tax deductions. The result is pot-based businesses get stuck paying tax on their gross profits (should they be profitable), as opposed to net profits like normal businesses.
You can essentially kiss any chance of legalization goodbye under the Trump administration
Though the public is holding out hope that lawmakers on Capitol Hill will take notice of the shifting tide toward marijuana, the chances of that happening are slim-to-none, and commentary from the chief of the U.S. Drug Enforcement Agency (DEA) last week supported that view.
DEA Chief Chuck Rosenberg reinforced his previous view on weed in just four words last week, saying that "marijuana is not medicine" while speaking at the Cleveland Clinic in Ohio.
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Despite acknowledging that medical marijuana has demonstrated some positive benefits in terms of treating childhood epilepsy, Rosenburg said, "If it turns out that there is something in smoked marijuana that helps people, that's awesome. I will be the last person to stand in the way of that. But let's run it through the Food and Drug Administration process, and let's stick to the science on it."
Rosenburg's commentary may refer to GW Pharmaceuticals' (GWPH) Epidiolex, an oral cannabidiol solution that wowed during multiple phase 3 trials in two rare forms of childhood-onset epilepsy, Dravet syndrome and Lennox-Gastaut syndrome. With statistically significant reductions seen in seizure frequency, Epidiolex is on track to potentially gain FDA approval, partially debunking Rosenburg's thesis on medical marijuana (i.e., it's cannabinoid-based, not smokable marijuana).
The DEA's scheduling of cannabis, however, makes FDA-approved clinical trials of medical marijuana very difficult to run. It's the ultimate Catch-22: the DEA needs more clinical evidence to consider altering marijuana's scheduling, but the FDA keeps a tight lid on the number of clinical trials that can be run on medical cannabis.
Marijuana stocks could struggle
With the DEA's chief having a negative view of marijuana, and the federal government unlikely to suggest a rescheduling with ardent opponent Jeff Sessions as attorney general, legal sales growth could all be for naught for marijuana stocks.
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The big factor that investors have to take into account is that marijuana stocks are regularly losing money. With the rare exception of Canadian medical marijuana producers and growers, such as Canopy Growth Corp., most pot stocks are deeply in the red.
For instance, cannabinoid-based drug developer Corbus Pharmaceuticals (CRBP 0.11%) is still in the clinical-stage of the drug development process, and it could be years before it's generating recurring revenue and has any shot at reducing its annual losses. Corbus' pipeline is reliant on a single developing drug, anabasum, and the company's $48.9 million in cash and cash equivalents will only last the company through 2018. In other words, marijuana stock investors are likely playing with fire by investing in Corbus, or practically any cannabinoid-based drug developer at this point.
My suggestion would be to not let your emotions get the better of you, and to stay away from marijuana stocks until we see some concrete policy changes from Washington, D.C.
