There's one development that would almost certainly cause marijuana stocks to skyrocket: the legalization of cannabis at the federal level in the U.S. With most Americans supporting marijuana legalization, you might think that this milestone is right around the corner. Think again.
It seems unlikely at this point that any changes will be made to U.S. federal cannabis laws in the next couple of years. A couple of 77-year-old men hold the power to keep such changes from happening. Two of the biggest obstacles for marijuana stocks are Republican Sen. Mitch McConnell of Kentucky and former Vice President and current Democratic presidential candidate Joe Biden.
Kentucky hemp means no grass
Investors who want to profit from the cannabis boom shouldn't get too worked up about legislation and rumors of legislation that could legalize pot in the U.S. Any such excitement is doomed to be short-lived.
For example, in November Aurora Cannabis, Canopy Growth (CGC 3.27%), and other top Canadian marijuana stocks soared on news that the U.S. House of Representatives Judiciary Committee overwhelmingly passed a bill to legalize marijuana at the federal level. But those gains quickly evaporated as investors realized the legislation would likely fizzle in the U.S. Senate.
The politics were and still are simple. No bill will come to the Senate floor for a vote unless the Senate majority leader wants it to happen. And the Senate majority leader right now is Mitch McConnell.
McConnell has a clear motivation for opposing federal marijuana legalization. There's a thriving hemp farming industry in his home state of Kentucky. The longtime senator played a key role in legalizing hemp in the U.S. with the 2018 farm bill. If marijuana were legalized, it would present a competitive threat to hemp farmers in the Bluegrass State. McConnell isn't likely to allow a bill to be voted on in the Senate that would threaten his constituents' livelihoods.
But what if the election results in November sweep Democrats into office and flip the Senate from GOP control? While that's not an impossible scenario, the current frontrunner among Democrats running for president is Joe Biden. The former VP leads his rivals by an average of 8 points, according to RealClearPolitics' average of national polls.
Unlike the other Democratic presidential candidates, Biden doesn't support federal legalization of marijuana -- at least for now. He prefers to take a slower approach.
Biden recently told The New York Times' editorial board that marijuana should be studied further to determine if use of the drug complicates other health problems. He maintains that he opposes federal legalization right now because "science matters."
In the past, the former vice president has indicated that he wouldn't want the federal government to interfere in states that have legalized marijuana. When asked by the Times' editorial board about these states' actions, he responded, "Sure they have. I get that, but that doesn't mean the science shouldn't be looked at."
Even if the Democrats take control of both chambers of Congress, don't look for federal marijuana laws to change anytime soon if Joe Biden becomes president. Looking at the science, as Biden wants to do, could take years.
The waiting game
Where does this leave investors? It's still a waiting game. The U.S. marijuana market will likely remain closed to the major Canadian cannabis producers for longer than they'd like.
There are still ways to profit from legalized marijuana in the U.S., however. Multistate cannabis operators based in the U.S. should continue to deliver strong sales growth. Cresco Labs (CRLBF -4.50%) and Green Thumb Industries (GTBIF -4.41%) are two of the top U.S. pure-play cannabis stocks to consider.
Don't rule out Canadian marijuana stocks, though. In addition to the opportunities in Canada's recreational pot market and in international medical cannabis markets, some Canadian cannabis companies have moved into the U.S. CBD market. Canopy Growth, for example, recently launched its first hemp-derived CBD products in the U.S.
For more cautious investors, the stocks of companies that serve the cannabis industry but also generate revenue in other ways could be more attractive. Scotts Miracle-Gro (SMG -0.02%) stands out as an alternative. The company ranks as a top supplier of gardening products to cannabis producers but makes even more money with its consumer lawn and garden business.
Despite the opposition of McConnell and Biden, it seems likely that U.S. marijuana laws will be changed sooner or later. In the meantime, investors will have to choose the cannabis stocks that they buy very carefully.