Marijuana has America seeing green in more ways than one.
The currently illicit drug has been gaining momentum at a rapid pace this decade with more than half of all respondents in national polls now offering a favorable opinion of marijuana. It's even pushed its way into the presidential debate spotlight, forcing the candidates to step into previously taboo territory and choose a position. Marijuana is also offering hope for medical patients with a variety of ailments in the 23 states where medical marijuana is currently approved.
But, marijuana also has state regulators seeing green -- as in dollar signs. Marijuana sales in Colorado, one of the first two states (along with Washington) to legalize recreational marijuana in 2012, topped $100 million per month during the summer, and Colorado voters in November approved Proposition BB, which will siphon a good chunk of tax revenue generated from retail sales back into Colorado's education system. To be clear, marijuana tax revenue isn't going to bridge huge budget gaps, but it's a step in the right direction for states looking to generate additional tax revenue. NerdWallet has suggested that a nationwide legalization could generate $3.1 billion in tax revenue, and that's certainly no chump change.
This marijuana initiative could crush big business
However, rolling out marijuana regulations on a state-by-state basis isn't easy. One reason is there's just no precedent to regulating the recreational marijuana industry, meaning it's a "learn as you go" sort of process. There will likely be some tinkering to state-level laws that govern marijuana as time goes on, but in the meantime we can probably assume some mistakes will be made. In fact, we might as well consider Colorado, Washington, Oregon, and Alaska, the four recreational-legal states, as national guinea pigs.
Yet, one marijuana initiative that's passed in three out of four recreation-legal states could threaten to undermine marijuana shops and larger businesses that are looking to profit from the move toward legalization. And no, this has nothing to do with Ohio residents' vote in favor of Issue 2 last month to ban monopolies and oligopolies within the state.
In Colorado, Oregon, and Alaska (but not Washington state, for the time being), homeowners have the option of growing marijuana plants for personal consumption. In Oregon, it's legal to possess up to four plants per household, regardless of the number of people in the residence. In Alaska, personal use laws allow for up to six plants per individual in a household (although no more than three may be in the mature/flowering stage) and up to 24 total plants within the household. Finally, in Colorado an individual can possess up to six plants (no more than three in the mature/flowering stage), with no more than 12 plants within the household. All three states consider resale of personal use marijuana to be a crime.
But what if consumers decide they don't want to pay prices that are substantially higher than the black market for legal marijuana in shops and instead choose to grow their own marijuana at home? Rapidly growing marijuana sales in Colorado suggest this may not be the case in that state, but it's too early to determine what sort of lost sales businesses might be experiencing in Oregon because consumers are growing marijuana for personal use in their own homes. If more states choose to adopt aggressive personal use growth laws, such as Alaska which allows 24 plants per household, there may be little to no room for big business to operate. I doubt that phases marijuana users all that much, but for investors looking to clean up on marijuana's expansion, it could be a huge blow.
Even bigger issues at stake for marijuana businesses
Although the ability of users to grow marijuana plants in their homes is a potential concern that marijuana-based businesses may eventually deal with, there are far more pressing issues at hand which may prevent their success.
First and foremost, businesses have to cope with an apathetic Congress. Lawmakers on Capitol Hill have not been shy about their intent on waiting for a more encompassing safety profile on marijuana to emerge before they make a decision on whether or not to lessen regulations on the illicit drug. Plenty of studies on its risks have emerged over prior decades, but trials looking at its benefits have only been ramped up in recent years. It takes time for this data to mature, and lawmakers are in no hurry to make a rash decision.
Secondly, because Congress appears unlikely to change its stance on marijuana anytime soon, it means existing businesses will continue to struggle to find access to basic banking services and credit lines, which will make expansion difficult. It also means they'll be paying higher taxes because businesses involved in the sale of federally illegal drugs are forbidden from taking normal business deductions on their taxes. In sum, you can practically kiss the prospect of hefty profits goodbye.
There are even ancillary issues yet to be resolved, such as the regulation of edible marijuana and the possible effect marijuana could be having on drivers. These are added complications that make the nationwide legalization effort look somewhere between difficult and impossible.
Even though marijuana's market potential is undeniably huge, too many concerns and unanswered questions still exist to consider investing in marijuana stocks. It's always possible that these concerns will be alleviated in time with positive clinical data and a more receptive Congress, but for the time being I'd suggest keeping your money far away from this industry.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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