In case you haven't noticed, cannabis has quickly become the next hot investment opportunity. Last year, global weed sales hit $10.9 billion, representing 221% growth from global sales just four years prior. Looking forward, various Wall Street estimates project that worldwide pot sales could top $50 billion, $75 billion, or perhaps even $200 billion a year in a decade.
And yet, despite this budding opportunity, marijuana remains firmly classified as a Schedule I substance under the Controlled Substances Act in the United States. In layman's terms, this means cannabis is entirely illegal, prone to abuse, and isn't recognized as having any medical benefits. As such, access to basic banking services is limited or nonexistent for most pot stocks, and corporate tax rates can be exorbitantly high due to Section 280E of the U.S. Tax Code.
How does the American public feel about this? That's what national pollster Gallup aims to find out with its now-annual survey on cannabis perception.
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Gallup releases its latest poll on America's perception of marijuana
Earlier this week, Gallup released its 2019 survey results on marijuana. It found that two-thirds (66%) of the 1,526 people it polled favored legalizing cannabis, compared to the 33% who opposed it and the 1% who had no opinion. This is a practically identical result from the year-ago period, where 66% of respondents favored nationwide legalization, 32% opposed it, and 2% had no opinion. Even accounting for a margin of error of plus or minus 3%, this is an overwhelming and statistically significant finding that shows the American public, as a whole, wants cannabis to be legal in the United States.
There are four particular nuances and data points that stood out with Gallup's most recent data release. First, it's important to note just how rapidly the opinion of the American public has shifted in recent years on marijuana. As recently as 2005, support for legalizing pot stood at just 36%, with 60% of those polled in favor of the drug remaining illicit. In just the past 14 years, this dynamic has completely been turned on its head.
Secondly, but perhaps building on the previous point, age plays a pretty important role when it comes to overall support for legalization. Overall, 4 out of 5 millennials favor legalizing cannabis in the U.S., whereas nearly 3 out of 5 seniors aged 65 and over oppose legalization. It's quite possible this rapid shift in support has to do with millennials aging (and therefore having their voices and vote count) and traditionalists aged 65 and over softening their views over time and/or passing away.
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Third, political preference matters. More liberal and moderate viewpoints, such as those shared by Democrats and Independents, tend to strongly support legalization. For example, self-identified liberals and party-affiliated Democrats showed 82% and 76% respective favorability toward legalization in Gallup's poll. Meanwhile, affiliates of the Republican Party and ideological conservatives demonstrated 51% and 48% respective support. Inclusive of the poll's margin of error, this doesn't suggest support.
Lastly, it's worth noting that vape-related health concerns don't seem to be impacting American's view of marijuana. Understandably, there are numerous ways to consume cannabis beyond vaping, but it's encouraging, from a business perspective, to see that the vape-related health scare hasn't cooled consumers' favorability toward legalization.
If so many people support legalization, why doesn't the federal government oblige?
If the American public overwhelmingly favors legalization and congressional lawmakers are supposed to represent the will of the people, you might be wondering why the U.S. federal government hasn't moved to legalize marijuana. The answer boils down to a handful of factors.
First of all, removing cannabis from the list of scheduled drugs would mean a hit in the revenue department for the federal government. U.S. Tax Code 280E disallows businesses that sell a Schedule I substance from taking normal corporate income tax deductions, save for cost of goods sold. This often leads to profitable weed businesses paying very high effective tax rates. If pot were suddenly legalized in the U.S., the federal government would lose an estimated $5 billion in revenue over the next decade.
Another problem is Senate Majority Leader Mitch McConnell (R-Ky.). Putting aside the fact that Republicans have a more negative view on cannabis than Democrats and Independents, McConnell won't even allow bill riders or independent pot-based legislation to reach the Senate floor for vote. Nothing short of Democrats taking control of the Senate or McConnell's retirement is likely to change this fact.
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It also can't be overlooked that marijuana simply isn't a polarizing issue. Lawmakers are in no rush to take up reform measures with other seemingly more important topics on their desks for discussion. Further, a survey from the independent Quinnipiac University in 2018 showed that cannabis isn't yet a single-issue voting topic. This means lawmakers can oppose legalization without fear of losing their elected seats (for now).
All of these factors suggest that, while support for marijuana remains high, the likelihood of cannabis reform remains particularly low in the near term.
State-level expansion gets a green light, but it comes at a cost
What does this mean for U.S.-focused marijuana stocks? On one hand, it means more of the same in the interim.
The federal government is liable to continue its hands-off approach to state-level management, which means cannabis stocks will have a green light in legalized states to open dispensaries, grow farms, and processing facilities. That's good news considering that U.S. pot stocks have spent a pretty penny on capacity expansion and acquisitions in recent months.
The concern here is that without federal reform, access to capital will remain dicey, at best, for most cannabis stocks. In many instances, this is going to lead to ongoing dilution in order to finance day-to-day operations and acquisitions.
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Take industry leader Curaleaf Holdings (CURLF 1.87%) as the perfect example. Curaleaf appears primed to become the first pot stock to generate $1 billion in annual sales. Its two major acquisitions, which will see Cura Partners' Select brand and privately held multistate operator Grassroots become part of the Curaleaf portfolio, will expand the company's presence to 19 states, as well as give it close to 70 operational dispensaries. Both figures are at or near the top of the pack among multistate operators.
However, with no substantive access to basic banking services, Curaleaf has been using its common stock to finance these deals. This has the potential to balloon the company's outstanding share count and weigh on its future per-share profitability.
Also, since marijuana remains illicit at the federal level, Curaleaf is unable to transport cannabis between states. This means setting up potentially costly and redundant operations in each and every state. Even though Curaleaf can succeed in this environment, it's certainly not operating at peak efficiency, by any means.
As much as the American public would like to see reform take place at the federal level, it's simply not in the cards right now.
