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These Stocks Are the Biggest Winners and Losers With Bernie Sanders' Marijuana Legalization Plan

By Keith Speights - Oct 27, 2019 at 6:00AM

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Pot stocks could "feel the Bern" in different ways if the Vermont senator gets his way.

Bernie Sanders has a plan for pot. The independent senator from Vermont and Democratic presidential candidate released his plan to legalize marijuana in the U.S. at 4:20 p.m. on Thursday. (The timing was intentionally symbolic: The number 420 has become associated with marijuana use.)

While most of his rivals support marijuana legalization to varying extents, Sanders doesn't intend to wait on Congress. His plan is to legalize marijuana throughout the U.S. within the first 100 days of his presidency through executive action.

Sanders' plan to legalize pot includes vacating and expunging all marijuana-related convictions from the past. He intends to use $50 billion in revenue raised from taxing legal marijuana on new federal programs focused primarily on minority communities.

As you might expect, this plan will also significantly impact marijuana stocks. Here are the biggest potential winners and losers under Sanders' marijuana legalization plan.

Sen. Bernie Sanders speaking with a photo of the U.S. Capital building in the background.

Image source: Bernie Sanders Senate website. 

Big winners

Although Sanders proposes to offer incentives for marijuana-related businesses "to be structured like nonprofits," that's not likely to change the financially motivated strategies for many existing companies in the cannabis industry. However, his idea of imposing "market share and franchise caps to prevent consolidation and profiteering" could jeopardize the expansion plans for some cannabis producers and retailers.

Even though Canopy Growth (CGC -3.28%) currently claims the largest market cap among marijuana stocks, I suspect the Canadian cannabis producer would be among the biggest winners should Sanders' plan go into effect. Canopy Growth has already put $300 million on the line upfront for the option to acquire U.S.-based Acreage Holdings for $3.4 billion. The deal will move forward only if the U.S. legalizes marijuana at the federal level.

Acreage Holdings doesn't have a dominant share of the U.S. market, and, of course, Canopy Growth doesn't have any presence in the U.S. marijuana market right now. As such, there doesn't appear to be a reason at this point to think that Sanders' marijuana legalization plan would threaten Canopy's buyout of Acreage.

I think Scotts Miracle-Gro (SMG -4.07%) would be another big winner from this plan. Scotts' Hawthorne Gardening subsidiary is already the top supplier of hydroponics products to the U.S. cannabis industry. The legalization of marijuana throughout the U.S. would likely open up a much larger market to Hawthorne.

My hunch is that Scotts' focus on supplying ancillary products to the cannabis industry rather than engaging directly in producing or selling marijuana could work in its favor. Sanders' plan seems to focus on pure-play marijuana businesses rather than pick-and-shovels businesses serving the cannabis industry like Scotts.

Another likely winner, in my view, is Innovative Industrial Properties (IIPR -3.01%). Sanders obviously prefers that there be a greater number of smaller marijuana producers and fewer large producers. This should work to IIP's advantage because it provides real estate capital primarily for small businesses in the U.S. cannabis industry.

Big losers

Sen. Sanders said that if he becomes president, he won't "allow marijuana to turn into Big Tobacco." In particular, he plans to ban tobacco companies from participating at all in the U.S. marijuana industry.

This proposed ban could be especially problematic for Cronos Group (CRON -2.44%). Tobacco giant Altria owns 45% of Cronos. Under Sanders' plan, Cronos would either have to abandon any hopes of entering the lucrative U.S. marijuana market or Altria would have to sell its stake in the company. Either option would be very bad news for Cronos.

It's a similar story for Auxly Cannabis (CBWTF -5.04%). The small, vertically integrated Canadian cannabis company received a big boost earlier this year when tobacco maker Imperial Brands invested 123 million Canadian dollars through a convertible debenture that could be converted into owning 19.9% of Auxly.

But marijuana businesses with a link to tobacco makers aren't the only potential losers with Sanders' marijuana legalization plan. Remember that he wants to institute "franchise caps" to keep any company from gaining too big of a market share. I think this could hurt several U.S.-based marijuana companies.

For example, MedMen (MMNFF -4.68%) could have to completely throw in the towel on its strategy to be the dominant cannabis retailer in the U.S. Cresco Labs (CRLBF 0.21%) and Green Thumb Industries (GTBIF -0.82%), both of which have been growing by expanding into new markets, could find their growth opportunities curtailed in a Bernie Sanders presidency.

Small chance?

These stocks could be big winners and losers under Sen. Sanders' marijuana plan, but how likely is it that the plan becomes reality? At this point, the odds don't appear to be great.

First of all, Sanders currently is only in third place among the Democratic presidential candidates, based on the latest RealClearPolitics national poll average. If Sanders manages to win the Democratic nomination, the current polls show that he'd beat President Trump. However, polls more than a year ahead of a major election aren't always reliable, as we saw in 2015 and 2016.

Investing in Canopy Growth, Scotts Miracle-Gro, or Innovative Industrial Properties based primarily on hopes that Bernie Sanders legalizes marijuana his way is a risky proposition. So is betting against Cronos, Auxly, MedMen, Cresco, or Green Thumb Industries based mainly on the expectation that Sen. Sanders will become President Sanders.

But the dynamics are definitely trending toward the eventual legalization of marijuana throughout the U.S. It could even happen within the next couple of years. And there will be plenty of big winners and losers.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Auxly Cannabis Group and Innovative Industrial Properties. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Scotts Miracle-Gro Company Stock Quote
The Scotts Miracle-Gro Company
$78.55 (-4.07%) $-3.33
Canopy Growth Stock Quote
Canopy Growth
$3.69 (-3.28%) $0.12
Cronos Group Stock Quote
Cronos Group
$3.00 (-2.44%) $0.07
Auxly Cannabis Group Inc. Stock Quote
Auxly Cannabis Group Inc.
$0.05 (-5.04%) $0.00
Innovative Industrial Properties Stock Quote
Innovative Industrial Properties
$98.62 (-3.01%) $-3.06
MedMen Enterprises Stock Quote
MedMen Enterprises
$0.06 (-4.68%) $0.00
Green Thumb Industries Stock Quote
Green Thumb Industries
$10.89 (-0.82%) $0.09
Cresco Labs Inc. Stock Quote
Cresco Labs Inc.
$3.88 (0.21%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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