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A Democratic Blue Wave Guarantees Nothing for Pot Stocks

By Sean Williams - Jul 29, 2020 at 7:21AM

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A Democrat sweep of the House, Senate, and Oval Office may not be a surefire victory for the cannabis industry.

It's safe to say that it's been a crazy year. We've watched the stock market plunge faster than ever before, as well as roar back quicker than it has in decades from a bear market low. We've also witnessed negative oil prices (for a very brief time), a record spike in the unemployment rate, and are working our way through an unprecedented pandemic.

And, oh yeah, we have an election coming up in just over three months that has the potential to completely shake up the direction the U.S. takes over the next couple of years. All 435 seats in the House of Representatives are up for election, along with a third of all Senate seats, and the big chair in the White House.

As you can imagine, there are a number of major issues expected to grab the spotlight during this election season. The ongoing response to the coronavirus disease 2019 (COVID-19) pandemic, how to reignite the U.S. economy, and job creation, are all topics bound to get plenty of attention.

But don't overlook marijuana.

A black silhouette of the U.S., partially filled in by baggies of cannabis, a scale, and rolled joints.

Image source: Getty Images.

A "blue wave" would be great for cannabis stocks, right?

Thus far, a majority of polls are suggesting that presumptive Democratic Party nominee Joe Biden has a commanding lead over Republican incumbent Donald Trump for the Oval Office. Similarly, a handful of swing state Senate seats are polling modestly in favor of the Democratic Party candidates.  While polling has proved fallible before, the potential for a Democratic "blue wave" does exist. Under such a scenario, Democrats could control the executive and legislative branch of government.

If this were to happen, there's a pretty good chance investors would see U.S. pot stocks ascend to the heavens. After all, it's Republican Senate Majority Leader Mitch McConnell (Ky.) who's continually blocked cannabis legislation from reaching the floor for vote. Likewise, Senate Banking Committee Chairman Mike Crapo (R-Idaho) has long opposed the idea of legalizing marijuana and has offered little assistance in furthering reform initiatives.

Presumably, if Democrats were in control of the House, Senate, and Oval Office, they should have little issue passing cannabis banking reform and/or legalizing marijuana at the federal level. According to national pollster Gallup's October 2019 survey on nationwide legalization, 76% of self-identified Democrats were in favor of waving the green flag, compared to 23% opposed to the idea. Support for legalization among self-identified Republicans stood at only 51%. 

Joe Biden listening to then-President Barack Obama speaking.

Joe Biden listening to then-President Barack Obama speaking. Image source: Official White House Photo by Pete Souza.

A Democratic sweep isn't necessarily the green light you might think it is

But before you get too excited about the prospect of a blue wave in 2020, let me caution that things might not be a rosy as you'd think for pot stocks with Democrats in firm control of Capitol Hill.

To begin with, a Joe Biden victory is unlikely to lead to meaningful federal reforms. Biden has previously stated that he's willing to decriminalize marijuana at the federal level, but has given no indication that he's in favor of legalizing the drug medically or recreationally. Let's not forget that Biden was a major proponent of the War on Drugs back in the late 1980s and early 1990s, having introduced a handful of bills that harshly dealt with drug dealers and users (and yes, this included marijuana).

Even if a blue wave were to result in the passage of cannabis banking reform, which would allow financial institutions to offer basic banking services and loans to the weed industry, this doesn't mean we'd see immediate benefits. With marijuana still illicit at the federal level, state-level legalizations would be needed for federal banking reform to have real teeth. The problem is, there are still more than a dozen states where cannabis is wholly illegal, and therefore where cannabis banking reform measures would prove pointless. This includes Texas, which could well be one of the largest marijuana markets in the U.S., if it were legalized in some capacity.

There's also a bit of a money issue that comes into play when discussing the legalization of marijuana. Since cannabis is an illicit substance at the federal level, companies that sell weed are exposed to Section 280E of the U.S. tax code. This tax code disallows cannabis businesses from taking normal deductions, save for cost of goods sold. In other words, profitable pot companies are paying an exorbitant tax rate, and as legalizations continue at the state level, the federal government is collecting extra revenue via taxation. If marijuana were legalized, this exorbitant tax rate goes away and actually costs the federal government money.

The point is, a blue wave doesn't guarantee that everything will go perfectly for U.S. pot stocks.

Multiple clear jars filled with unique strains of cannabis on a dispensary store counter.

Image source: Getty Images.

Two pot stocks set up for success, no matter who wins

However, there is good news. There are a handful of U.S. cannabis stocks set to thrive no matter who wins the presidency or what political party controls the House and/or Senate.

Take Green Thumb Industries (GTBIF 1.36%) as a perfect example. Green Thumb is one of a select few large multistate operators (MSO) to gain access to nondilutive forms of financing, so cash isn't a concern. It's also making excellent headway in a number of key markets. Green Thumb is aiming to maximize its presence in Illinois, which opened its doors to recreational pot sales on Jan. 1, 2020, and purchased its way into tourist-heavy Nevada last year via the Integral Associates buyout. Nevada is expected to lead the country in cannabis spending per-capita within a couple of years. With recurring profitability around the corner, Green Thumb is in great shape.

The same could be said for Cresco Labs (CRLBF 5.19%), another MSO with an eye for Illinois. Cresco Labs has opened up eight of its 18 operational dispensaries in the Land of Lincoln. However, Cresco's inroads in California look even more intriguing. Through its acquisition of Origin House, one of the few companies to hold a cannabis distribution license in the Golden State, Cresco gained access to more than 575 dispensaries. It'll be able to offer its products throughout these dispensaries in the biggest marijuana market in the world, which is why it's expected to be one of the fastest-growing pot stocks.

Investors should remain picky, because not all U.S. pot stocks are of the caliber of, say, Green Thumb and Cresco Labs. But understand that who's in the White House isn't nearly as important as what's going on at the state level over the next couple of years.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Cresco Labs Inc. and Green Thumb Industries. The Motley Fool has a disclosure policy.

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