The widespread legalization of marijuana in America is creeping ever closer. Does that mean it’s time to buy marijuana stocks? It’s complicated.
The legal marijuana industry is booming in the United States, leaving many investors searching for the best ways to invest in marijuana. Perhaps the bigger question is, should you invest in marijuana stocks?
The reality is that, without federal legalization, institutional investors and major corporations will continue to avoid the marijuana market entirely. This is both a problem and an opportunity when it comes to investing in the marijuana industry.
In an effort to comply with federal regulations and avoid the ire of federal authorities, major financial institutions continue to shun this budding industry. Certainly walking into a legal dispensary in my home state of Colorado is a lot different than purchasing marijuana through an illicit black market sale from a drug dealer.
But without major financial institutions and payment processors on board, the transactions are either entirely cash-only or conducted through a credit card without the permission of the dispensary’s payment processor. The whole process still feels less than legal.
This is a problem.
Similarly, marijuana stocks are generally lacking investment from major institutions and fund managers looking to stay on the right side of federal law, regardless of state laws. Many of these potential investors would otherwise be interested in marijuana stocks from the perspective of investing in “high”-growth agriculture, sin and the other categories into which the marijuana industry falls.
This is also a problem.
But these problems also create opportunities for us individual investors. As “the little guys,” we have the flexibility to invest in the marijuana industry well before the “big guys” join in and drive prices higher.
But should we?
Social perceptions regarding marijuana are clearly changing. Marijuana legalization appears to be spreading throughout the U.S. Roughly 12.6 million Americans are regular users and a majority of Americans favor legalization for the first time. The chart below from the Pew Research Center illustrates the number – over time – of Americans in favor of legalization versus those favoring criminalization.
Demographic data suggests that this trend is only going to increase over time. The chart below, also from the Pew Research Center, illustrates this point clearly.
Though the World Health Organization says that the U.S. is the largest per-capita user of marijuana, the opportunity to profit from marijuana is bigger than just the U.S. market. The United Nations estimates that 158.8 million people worldwide use marijuana, roughly 4% of the world’s population.
Many argue that marijuana is less harmful than alcohol and tobacco – both of which are legal and highly profitable – when making their case for legalization. A recent Washington Post article offer validity to that argument, suggesting that marijuana is responsible for even fewer emergency-room visits than alcohol.
Whether or not this argument is driving public opinion is up for debate. But it’s pretty clear that something is driving public opinion towards decriminalization and even full legalization. This map shows how marijuana laws throughout the country are relaxing with almost every election cycle.
And what of the harm that the “wacky tobacky” is supposed to be inflicting upon America’s youth as more and more states decriminalize and legalize marijuana? Just yesterday the Washington Post reported that teen marijuana use fell in 2013 and 2014.
Hopefully by now I’ve convinced you that legalization is coming. But what of the investment opportunity? As of November, the State of Colorado had collected $36.5 million in fee, license and marijuana tax revenue.
This, of course, doesn’t count revenue from marijuana tourism, income taxes paid by “budtenders” who work in the new dispensaries, and many other positive economic impacts. In fact there are an estimated 7,500 to 10,000 marijuana-related jobs in Colorado alone.
The national legal marijuana market is estimated to grow to $10.2 billion in five years, up from $1.53 billion in November. That’s the kind of growth I’d like to invest in.
Should you invest in marijuana? Yeah, man. At least if you have the stomach for speculation in a “high”-risk, “high”-reward industry that’s still deemed illegal by the federal government.
I think there are several marijuana stocks that have graduated from “penny stock” status and are now worthy of investment, though most only belong in your portfolio if you recognize their speculative nature. In the coming days I’ll take a closer look at some of the best ways to invest in marijuana.
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