As you've probably noticed from the increasing amount of political advertisements on television, radio, and online, we're in the thick of election season. In roughly eight months, citizens across the country will be heading to the polls to decide who'll lead the United States forward for the next four years.
But before we get to this point, Americans will be looking to the remaining candidates to expound their plans on a variety of issues. Among them will be the topic of marijuana, which is poised to be in the limelight as a key voter topic.
Marijuana is federally illegal, which is causing problems at the state level
According to an October 2019 Gallup poll, a record-tying 66% of Americans favor the idea of legalizing marijuana nationally, with a 2018 Quinnipiac poll showing that more than 9 out of 10 people approve of the idea of physicians being able to prescribe medical cannabis. Yet as of today, marijuana remains a Schedule I drug at the federal level. This means it's entirely illegal, prone to abuse, and isn't recognized as having any medical benefits.
Despite the fact that 33 states have legalized medical marijuana since 1996, it doesn't hide the fact that the U.S. pot industry is struggling under the magnitude of this Schedule I classification.
For example, cannabis-based companies have struggled mightily to gain access to basic banking services, which include everything from lines of credit to something as simple as a checking account. Banks and credit unions are fearful of providing these services because of possible criminal and/or financial penalties, so the U.S. cannabis industry is left to deal predominantly in cash, which is a security concern and growth inhibitor for the industry.
Likewise, the Schedule I classification subjects cannabis companies to Section 280E of the U.S. tax code. Implemented back in the early 1980s, 280E disallows businesses that sell a federally illicit substance from taking normal corporate income-tax deductions, save for cost of goods sold. In short, 280E leads to profitable pot companies being taxed at a high effective rate.
Senators Bernie Sanders and Elizabeth Warren push their plans for legalization
The seemingly good news is that a majority of the remaining presidential candidates seem to favor legalizing pot. With the exception of former Vice President Joe Biden (D), former New York City Mayor Michael Bloomberg (D), and President Trump, who'll secure the Republican Party nomination, all other remaining candidates favor legalization. In fact, Senators Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.) have laid out somewhat similar plans to tackle this objective.
In October, Sanders presented a four-pronged plan to legalize marijuana in the U.S. Without getting too far into the weeds, Sanders' plan uses an executive order to legalize weed within the first 100 days. It also calls for the expungement or review of current/previous cannabis convictions and collects tax revenue on legal marijuana sales that'll be used to aid communities and people hit hardest by the war on drugs by issuing grants or loans.
Meanwhile, Warren, who detailed her legalization plan earlier this week, offered up a two-tiered approach that's very similar. In her "Just and Equitable Cannabis Industry" plan, Warren would first ask Congress to pass the Marijuana Opportunity Reinvestment and Expungement (MORE) Act and would proceed to use an executive order if lawmakers don't. As part of this initial approach, Warren also aims to have prior convictions removed, which would include ensuring that immigrants are not penalized over previous cannabis convictions.
As for the second part of her plan, Warren wants to prioritize opportunities for minorities and communities that were disproportionately impacted by the war on drugs. This would also include allowing banks to service the cannabis industry.
Surprise! A Sanders or Warren presidency could be terrible for marijuana stocks
While Sanders and Warren have both led the charge to legalize marijuana among the remaining presidential candidates, the end result of either becoming president for pot stock investors may not be as green as you'd think. That's because Sanders and Warren have also pushed for the unionization of marijuana businesses and the prevention of industry consolidation.
For instance, Sanders and Warren have both highlighted that they wouldn't allow Big Tobacco to enter a legal U.S. pot industry. That would be particularly worrisome news for Altria Group (NYSE:MO), which has seen its cigarette shipment volumes slip with consistency as U.S. adult-use smoking rates have pushed to record lows.
As a refresher, Altria Group completed a $1.8 billion equity investment into Canada's Cronos Group (NASDAQ:CRON) last March, giving it a 45% stake. Considering Altria's keen knowledge of marketing and product development, especially when it comes to smokable products, the expectation has been that Altria would help Cronos develop a line of cannabis vapes. Eventually, the hope is that legalization would allow Cronos and its partner to offer these higher-margin products in the United States. But neither Sanders nor Warren would allow such a move.
Another concern is that Sanders and Warren would potentially limit the market share of larger pot corporations. That's worrisome for Canadian grower Canopy Growth (NYSE:CGC), which has a contingent-rights cash-and-stock deal in place to acquire vertically integrated multistate operator Acreage Holdings (OTC:ACRGF) if cannabis is legalized in the United States.
Acreage already has a pro forma presence in 20 legalized states, with 31 operational dispensaries currently open in 12 states. But if Acreage were to open its full allotment of around 90 retail stores, Warren or Sanders might view Canopy's size as a threat to market competition in the U.S.
We're still eight months from Election Day, so adjusting your cannabis investment thesis on "what ifs" isn't going to be a good idea. But should Warren or Sanders win the Democratic Party nomination and go on to defeat Donald Trump in the general election, it could be bad news for some prominent cannabis stocks.