The legal marijuana industry has been practically unstoppable recently. Legal sales of medical and recreational marijuana are expected to grow by roughly 30% in 2017, 45% in 2018, and peak at north of $17 billion in 2021, per the "Marijuana Business Factbook 2017," a newly released report from Marijuana Business Daily. And this growth has meant one thing to businesses and investors: dollar signs.
Over the past year, a number of marijuana stocks have doubled or tripled in value. Investors have been almost blindly buying into pot stocks with the expectation that state-level expansion will continue, and that recreational legalization in our neighbors to the north, Canada, could be a reality as early as next summer.
Image source: Getty Images.
Jeff Sessions and the federal government hold the marijuana industry back
However, marijuana stocks and the industry have one big hurdle they've yet to overcome: restrictive U.S. federal laws.
Even though 28 states have legalized medical cannabis and residents in eight states have voted in favor of legalizing recreational weed, the federal government has been unwavering on its view of marijuana as a schedule I substance. A schedule I drug -- which places marijuana on par with heroin and LSD -- is entirely illegal and has no recognizable medical benefits. This scheduling also exempts pot-based businesses from taking normal corporate tax deductions, and it makes it incredibly tough for weed businesses to secure basic banking services, including something as simple as a checking account.
The U.S. Drug Enforcement Agency (DEA) had an opportunity to reschedule marijuana last summer, but chose to deny two petitions requesting it do so. The DEA cited a lack of safety and clinical benefit evidence, based on findings from the Food and Drug Administration, and signaled that a system of checks wasn't in place to regulate dispensing cannabis for medical purposes. Since the DEA can take years to review petitions, it seems unlikely that the regulatory body would review weed again anytime soon.
By a similar token, Congress isn't in any rush to consider rescheduling pot, despite the latest CBS News poll from April showing that support for marijuana's legalization reached an all-time high of 61%. Lawmakers have repeatedly suggested that they want more clinical evidence of the benefits and risks of marijuana use before they'd consider adjusting its scheduling. Yet, the irony is that the pot's current scheduling makes running clinical trials extremely difficult.
Image source: President Donald J. Trump's official Facebook page. Photo by Benjamin D. Applebaum.
And at the center of it all is newly appointed Attorney General Jeff Sessions. While in the Senate, Sessions made it very clear that he opposes any expansion of marijuana, and has gone on record numerous times suggesting that marijuana is not medicine, and that it leads to an increase in crime. Though Sessions received no money apportioned by the federal government to crack down on marijuana use and weed-based businesses in the 2018 budget proposal, Sessions' sway with President Trump could change that tune in the years to come.
Remember, White House press secretary Sean Spicer commented in February that the Trump administration would be markedly different in regulating marijuana than the Obama administration, meaning a crackdown could still be coming.
Add this all together, and we have a pretty encompassing view of why most marijuana stocks are still losing money, and why they may continue to do so for the immediate future.
This Jeff Sessions rumor could spark a rally in marijuana stocks
However, there could be a proverbial light at the end of the tunnel for marijuana stocks.
According to reports from multiple news agencies, the relationship between President Trump and Attorney General Sessions has become strained to the point that Sessions has suggested he might resign. The friction, per sources, stems from Sessions' decision this past March to recuse himself from anything related to the ongoing Russian investigation, which was a decision President Trump learned about just minutes before Sessions' announcement.
Image source: Getty Images.
To be clear, this is just a rumor at this point, albeit it's a loud rumor with pressure from within Congress calling for Sessions to resign. If Sessions were to step down as Attorney General, it could be the spark that marijuana stocks are looking for.
Understandably, Sessions isn't the only issue on Capitol Hill. Without Sessions, the schedule I categorization of weed would still stand, as would the restrictive tax treatment of profits and inability to gain access to basic financial services. But, a key figure that had threatened to crack down on state's rights when it comes to marijuana would presumably be gone, which would reduce the chances of states like Colorado, Washington, Oregon, and soon California, having their recreational marijuana industries scaled back or closed entirely. It would be a big weight lifted off the shoulders of the industry.
Here's what it wouldn't do
Yet, as noted above, the restrictive nature of cannabis' scheduling wouldn't change, which means most marijuana stocks would, at the end of the day, still be unprofitable.
The marijuana stocks that demonstrate the most promise, but also those with the steepest losses at present, are those working toward creating cannabinoid-based medicines.
Image source: GW Pharmaceuticals.
GW Pharmaceuticals (GWPH +0.00%), the kingpin of the bunch in terms of market cap, successfully completed a handful of late-stage clinical studies involving its oral drug Epidiolex in patients with two rare types of childhood-onset epilepsy. Even though an approval from the FDA would seem to be in the cards, GW Pharmaceuticals is still on track to lose money through 2019, and its accumulated deficit (i.e., how much money it's lost since inception) has ballooned to nearly $279 million through the second quarter of 2017. Having Sessions out of office does nothing to improve these fundamentals. Even with a bright future for Epidiolex, it may be tough to extract any further value out of GW Pharmaceuticals -- and the case is the same with many other marijuana stocks.
This the dilemma for marijuana stocks: removing Sessions from the picture lightens the load of federal intervention in already legal states, but it does nothing to remove the murkiness of weed's schedule I status at the federal level. That still makes marijuana stocks worth avoiding in this Fool's opinion.
