The legal cannabis industry is budding before consumers' and investors' eyes. According to Marijuana Business Daily's report entitled "Marijuana Business Factbook 2017," legal weed sales in the U.S. are expected to jump by 45% in 2018 and by around 300% as an aggregate between 2016 and 2021. If these estimates prove accurate, the U.S. market could account for $17 billion in legal marijuana sales by 2021. That's the type of growth that investors have had a hard time ignoring.
Beyond sales, we're also witnessing a clear shift in the way consumers think about pot. What was once a taboo topic now is a mainstream discussion happening in legislatures and households around the country. In Gallup's October 2017 poll, favorability toward national legalization soared to 64%, which represents its highest level in nearly 50 years of survey-taking. A separate poll conducted by the independent Quinnipiac University in August found that an overwhelming 94% of respondents favored legalizing medicinal marijuana compared to only 4% who opposed the idea.
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This shift in opinion is a big reason why we've seen 29 states legalize medical cannabis since 1996 and nine states greenlight recreational marijuana. In fact, a handful of states have moved forward with legalization efforts entirely at the legislative level -- i.e., without putting the measure to vote on a ballot.
Nevada is setting the standard for recreational marijuana sales
One of the more recent states to have legalized cannabis for recreational use (in November 2016) is the Silver State, Nevada. Though four other states also legalized adult-use pot in the November 2016 election, Nevada was the first to open its doors to consumers on July 1, 2017. Since doing so, Nevada has been selling adult-use weed at a record-setting pace.
According to data collected by Marijuana Business Daily, Nevada sold $195 million worth of recreational cannabis during its first six months of sales. By comparison, Washington state and Colorado, which were the first two states to have legalized recreational weed back in November 2012, sold a respective $67 million and $114 million in their first six months. In other words, Nevada's recreational-marijuana sales have set the standard for any subsequent state to beat.
Why have Nevada's adult-use weed sales rocketed out of the gate more quickly than Washington's and Colorado's? First, Nevada had an early-start program in place that allowed licensed dispensaries to sell adult-use cannabis while the rules and regulations of the recreational-weed program within the state were being hashed out.
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Secondly, Nevada was able to observe what worked and didn't work from Washington and Colorado acting as industry "guinea pigs." This made its own recreational launch that much smoother.
And finally, Nevada is home to a massive tourist industry, thanks predominantly to Las Vegas. This isn't to say that tourists aren't heading to Washington or Colorado, but when it comes to top-tier U.S. destinations, Sin City is usually high on the list. Early sales data shows that recreational sales have yet to increase for two months in a row, demonstrating just how important (and lumpy) the tourism industry has been for sales in the early going.
The U.S. is mostly a no-go zone for marijuana investors
Yet in spite of Nevada's early success and the fact that Colorado nearly hit $1.5 billion in annual cannabis sales last year (medical plus recreational), the United States is generally worth avoiding for pot-stock investors.
For starters, cannabis is still a Schedule I substance at the federal level, and that doesn't look to change anytime soon. A Schedule I drug is wholly illegal, considered to be highly prone to abuse, and isn't recognized as having any medical benefits. At any point in the future, the federal government could choose to reinforce its superseding law via the Controlled Substances Act and crush the legal pot industry that certain states have allowed to thrive.
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This scheduling, even without direct interference from the federal government, makes life very difficult for patients and businesses. Marijuana companies are unable to take normal corporate income-tax deductions since they're selling a federally illegal substance, leaving them with an effective tax burden that could be as high as 90%. Also, most pot companies in the U.S. aren't able to obtain basic financial services, even including something as simple as a checking account.
To make matters worse, Attorney General Jeff Sessions has declared war on the marijuana industry. In January, he rescinded the Cole memo, which had provided loose protections to states that had legalized cannabis in some capacity by keeping the federal government off their backs. The rescinding of the memo cleared the way for state prosecutors to use their discretion when bringing charges against businesses and individuals, even in states that have legalized pot.
Marijuana stocks abandon the U.S. in favor of Canadian and international markets
As a result of the United States' harsh stance toward pot, a number of marijuana stocks have begun selling their U.S. assets or turning their focus elsewhere.
Canadian growing giant Aphria (NASDAQOTH: APHQF) somewhat recently announced its plans to strategically review its position in the U.S. market. Shortly thereafter, on Friday, Feb. 2, Aphria announced that it had sold a minority stake in Arizona-based Copperstate Farms for a little over $15.4 million ($20 million Canadian). Aphria also has investments in cultivation operations in Florida that may be sold -- at least based on its divestment in Arizona.
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By a similar token, Canopy Growth Corp. (CGC 2.68%), the largest pot stock by market cap, has stated that it has no intention of entering the U.S. market if marijuana remains illegal at the federal level. Mind you, Canopy Growth has well over $300 million in cash and cash equivalents on hand to fund deals and greenhouse development, and the U.S., if legal, would be the most lucrative market in the world for marijuana. Nevertheless, Canopy Growth is choosing to focus instead on constructing 3.4 million square feet of growing facilities in British Columbia and supplying both domestic and international markets with dried cannabis.
If investors are smart, they, too, are going to follow the lead of Canadian pot stocks and avoid the U.S. market and most U.S.-based pot stocks. If you want to invest in marijuana stocks, look to Canada, not the U.S., as the perfect place to start your research.
