Over the next decade, there are few industries expected to grow as quickly as marijuana. Even taking into account the near-term struggles associated with getting a nascent industry off the ground, Wall Street is looking for between $50 billion and $200 billion in worldwide annual sales by 2030. That'd be up from the $10.9 billion in legal sales logged in 2018.
Among the opportunities available to pot stock investors, none is pronounced than the United States. The U.S. is likely to account for between 33% and 50% of global weed sales by 2030. To date, 33 states have legalized medical marijuana, with 11 of these states also giving the OK for adults to consume recreational cannabis. There's also a strong likelihood that these figures will increase following the November 2020 election.
Yet as of now, marijuana remains an illicit substance at the federal level.
Marijuana's Schedule I classification is a bigger problem than you may realize
Even though surveys consistently show that a majority of adult respondents favor legalizing recreational and medical cannabis in the U.S., lawmakers haven't changed its Schedule I classification. This means it's a substance that's entirely illegal, considered prone to abuse, and not recognized as having any medical benefits.
Since individual states have been allowed to regulate their own cannabis industries, this scheduling may not seem like a big deal. But make no mistake about it, the ongoing classification of marijuana as a Schedule I substance is making life difficult for direct players operating from seed-to-sale, and the ancillary players that aren't even coming in contact with the plant.
As an example, companies that sell a Schedule I substance are subject to Section 280E of the U.S. tax code. This section of the code was developed back in the early 1980s to disallow drug dealers from writing off their "business expenses" on their federal income-tax return. Inadvertently, it today keeps cannabis businesses in legalized states from taking any normal corporate income-tax deductions, save for cost of goods sold. This tends to result in very high effective tax rates for profitable pot companies relative to "normal" businesses.
Another issue with marijuana's current scheduling is that it's been exceptionally difficult for cannabis-based companies to secure traditional forms of financing, such as a credit line or a loan. Some can't even secure a checking account. The reason being that banks and credit unions report to the Federal Deposit Insurance Corporation, which is a federally created agency. Providing basic financial services to an industry that's selling an entirely illegal substance (at least federally) could be grounds for financial and/or criminal penalties.
This Schedule I classification also means that cannabis cannot be transported between states, even if those states border each other and both have chosen to legalize the substance. This requires vertically integrated multistate operators like Curaleaf Holdings (CURLF 4.40%) to set up redundant operations in every legalized state. In other words, once Curaleaf's pending acquisitions are closed, the company will have more than six dozen operational dispensaries and have a presence in 19 states, but will need to also open processing sites and cultivation farms in each one of these states to control the seed-to-sale process. That's not helping multistate operators like Curaleaf push toward profitability.
These 11 words should seriously worry the U.S. pot industry and investors
However, the good news is that the 2020 elections may open the door for change. On the Democratic Party ticket, almost every remaining candidate has voiced support for the legalization of marijuana at the federal level, or gone as far as to lay out the specifics of how they'll get it done, as is the case with Sen. Bernie Sanders (I-Vt.) and Sen. Elizabeth Warren (D-Mass.). It's not a perfect green sweep -- former Vice President Joe Biden and former New York City Mayor Michael Bloomberg are supportive of decriminalization, but not legalization -- but there's real hope that these Democratic Party candidates, if elected as president, could effect change.
On the other side of the aisle is Republican incumbent Donald Trump. Trump has previously stated his support for the right of states to make their own choices but has largely kept his views on recreational marijuana under wraps. But according to Marc Lotter, the director of strategic communications for Trump's 2020 re-election campaign, Trump's thoughts on cannabis might be the most negative of all the remaining candidates.
In an interview with KLAS-TV, a Las Vegas affiliate of CBS, Lotter tackled a question from the station's news anchor regarding Trump's stance on marijuana. Said Lotter:
I think the president has been pretty clear on his views on marijuana at the federal level. I know many states have taken a different path. I think what the president is looking at is looking at [sic] this from a standpoint of a parent of a young person to make sure that we keep our kids away from drugs. They need to be kept illegal. That is the federal policy.
Note those last 11 words: "They need to be kept illegal. That is the federal policy."
Although Lotter walked back the idea of putting words in President Trump's mouth, it would appear the administration's stance will remain to keep cannabis a Schedule I drug.
Additional evidence suggests that Trump is no fan of the green rush
Of course, we don't have to just take Trump's director of strategic communications' word for it. The president has provided compelling evidence that he's not exactly the biggest fan of the cannabis industry.
For instance, Trump appointed former Alabama Sen. Jeff Sessions, a Republican, as his Attorney General. Sessions was very possibly the most ardent opponent of marijuana on Wall Street. On one occasion, Sessions, who resigned in November 2018, wound up sending a letter to some of his congressional colleagues requesting that they repeal the Rohrabacher-Farr Amendment, which protects medical marijuana businesses in legalized states from federal prosecution. While Sessions was mostly unsuccessful in his fight against the U.S. pot industry, he did rescind the Cole Memo in January 2018.
President Trump has also included signing statements in passed federal funding legislation. A signing statement is something presidents include when they believe their executive authority could be impinged. A signing statement would effectively allow Trump to go back on his promise of respecting states' rights and implement federal law. While this seems highly unlikely, it nevertheless doesn't close the door on the possibility that Trump could clamp down on the U.S. pot industry.
While there's still a lot to be decided before we know who'll be president for the next four years, the prospect of real change being effected at the federal level regarding marijuana's scheduling could go way down if Donald Trump sees a second term.