Ready or not, legal marijuana could be coming to a state or city near you in the not-too-distant future.
Since 1996, we've witnessed an incredibly quick rate of expansion for marijuana at the state level. Beginning with California legalizing medical marijuana, 22 additional states, along with Washington, D.C., now allow for medical cannabis to be prescribed by physicians for specific ailments that vary by state.
This expansion has happened despite the federal government hardly budging on its stance toward marijuana. The Obama administration has lifted some of the hoops that researchers would need to jump through prior to commencing a clinical study into the benefits or risks of the drug, but as a whole, the marijuana plant is still just as illegal today as it was in 1996 at the federal level.
It's not just medical marijuana that's expanding at a rapid pace. Recreational marijuana has been approved by voters in four states since 2012 -- Washington, Colorado, Oregon, and Alaska -- and it's forecast to expand in a big way during the November 2016 elections. Nevada already has collected enough signatures to get a recreational initiative on its ballot, and it's likely that California, Ohio, and perhaps more than a half-dozen additional states may look to legalize marijuana completely this November.
Legal marijuana sales could soar to new heights
Just how quickly could legal marijuana sales actually grow? That's a question cannabis research firm ArcView Market Research, in combination with New Frontier Data, sought to answer in their latest report.
According to ArcView, legal marijuana sales grew by roughly 17% in 2015, to $5.4 billion from $4.6 billion in 2014. This $5.4 billion figure includes more than $1 billion in medical marijuana sales in California, the nearly $1 billion that Colorado sold in legal marijuana in 2015, and the more than $500 million in legal cannabis sales in Washington state.
In the current year, ArcView is projecting legal sales growth of 25%, to $6.7 billion. But this is just the tip of the iceberg based on ArcView's estimates. Growth between 2016 and 2020, primarily a result of continued state-level legalization efforts, is projected to grow at an average rate of 30% per year, culminating in an estimated $22 billion in legal sales by 2020. That would be quadruple the amount of legal marijuana sales in 2015.
This expectation for expansive growth comes on the heels of improved polling numbers from the public. National pollster Gallup showed in October that 58% of Americans now back the legal use of marijuana. For added context, a decade, ago just 36% were in favor of legalizing the drug, and favorability stood at just 25% as of the mid-1990s. You'll see similar responses among the public in other national polls, such as Pew Research and General Social Survey.
When examining medical marijuana legalization, public support grows even more strongly. A CBS News poll from April 2015 showed that legal medical marijuana support stood at 84%, an all-time high.
Federal inaction is bad news for investors
Based on these growth estimates and the poll numbers, you might be considering an investment in marijuana stocks. That, however, could wind up being a big mistake.
Even though legal marijuana sales are growing, investors' avenues to profit from growth in legal marijuana sales are being stifled by the inaction of the federal government.
As it stands now, marijuana is a schedule 1 substance, meaning it's illicit and has no recognized medically beneficial properties. Because it's illegal at the federal level, banks have kept themselves at a distance from marijuana-based businesses.
It's not that state-level regulators haven't put workarounds in for banks to deal with marijuana businesses so much as banks simply don't want to go through the hassle of jumping through those hoops and potentially risk federal prosecution for money laundering many years down the road. The result is that there's minimal access to checking accounts and lines of credit for marijuana businesses, which forces them to deal mostly in cash. This is a security risk and a reason why expansion could be stymied.
On top of minimal banking access and security concerns, marijuana businesses are also drawing the short straw when it comes to taxes. Although illegal at the federal level, marijuana businesses must still pay federal taxes on their profits. Furthermore, because their principal product is illegal, marijuana businesses are unable to take standard business deductions, such as rent, on their taxes.
In sum, marijuana businesses are being overtaxed, they're getting little to no help from our nation's financial institutions, and Congress is in no rush to change its opinion on the drug.
Right now, we're heading into an election year, which is critical for both political parties. Even though the polls suggest that marijuana legalization is viewed favorably by more people than not, neither side wants to be the one to make a rash decision and lose the chance at the oval office. Even President Obama has noted that marijuana reform is not on his agenda during his final year as president.
What does all of this mean? Personally, I view it as a sign that marijuana's expansion should be viewed objectively from the sidelines rather than as an investor. If things change at the federal level, then it very well could make sense to consider investing in marijuana stocks.
Once those inherent disadvantages are gone, these companies could become growth stocks to die for. However, until that happens -- if it ever happens -- marijuana stocks remain a very dangerous investment, at best.
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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