- Although cannabis remains illegal on a federal level, two-thirds of the states have introduced new laws to legalize recreational and/or medical use.
- There are plenty of start-up companies hoping to capitalize on this new industry, and many are publicly traded on the stock market.
- As with any other investment, you must balance your optimism with the potential risk of failure.
The times, they are a’ changing. Bob Dylan’s iconic song lyric is a simple but accurate way to describe the explosion of the North American cannabis industry. (It’s somewhat ironic that Dylan was one of the most public celebrity users of the product, way back in the 60s.) Regardless of your own personal, moral, or religious viewpoints on the matter, the legalization of cannabis is slowly moving through society.
To date, at least 19 states have legalized recreational use of cannabis. A total of 38 stats have legalized medicinal use too. Legalization bills are pending in other states too, such as North Carolina. The result of these shifting social values (and associated laws) gives new meaning to the term “going green.” The legal cannabis industry is estimated to be worth $13.2 billion in 2021. That doesn’t even include the federal legalization of cannabis products in Canada.
Business is Booming
The cannabis industry has, naturally, exploded in the wake of broad legalization. Some experts predict it will surpass $25 billion by 2025 and more than $40B by 2030. For the savvy investor, that kind of growth is mouth-watering. There are plenty of upstart cannabis companies who are already publicly traded ventures. That means you can buy and sell their stock, the same as you would Apple, Nike, or Coca-Cola.
But should you? That’s the $64,000 question. (Or more or less, depending on your investment budget.) There are definitely some pros and cons to investing your money into the “other green” industries. Let’s talk about them before you decide whether cannabis stocks deserve a spot in your investment portfolio.
The Moral Issue
The cannabis industry as a whole has been subject to decades (centuries, even) of villainizing propaganda, from a variety of different sources. Lots of it originated from competing industries (alcohol and tobacco lobbies) or was rooted in quasi-racist political shouting. It seems that society is starting to finally realize the truth about cannabis, which is that’s is actually less dangerous than drinking and more beneficial than some high-priced pharmaceutical painkillers.
Despite that, some of you probably still think that cannabis is harmful, criminal, or just downright evil. That’s totally okay. If you have personal objections to investing your money into the cannabis industry, we certainly won’t try to convince you. In fact, plenty of investors avoid certain stocks for their own moral reasons, whether it’s unhealthy fat food companies, apparel companies with questionable labor practices, or weapons manufacturers. Socially responsible investing is a thing. Only you can decide your own tolerance level.
The Legal Issue
Legal issue? But didn’t we just tell you that cannabis has been at least partially legalized in roughly three-quarters of North America? Well yes, but actually no.
It’s true that cannabis has been legalized federally in Canada, but the same doesn’t hold true in the United States. Technically, cannabis is still illegal at the federal level in the States. Although federal laws normally trump state ones, the status quo right now is seeing the feds let individual states decide for themselves. However, that could change.
The MORE Act
The Marijuana Opportunity Reinvestment and Expungement (MORE) Act is a federal bill that is currently before the U.S. Senate. If passed, it would legalize cannabis products on a federal level. It would also expunge the criminal records of non-violent marijuana offenders and commit funding to social and criminal justice programs (funded by taxing the sale of cannabis). The MORE act, if passed, would still leave the legalization of cannabis products up to individual states.
The MORE Act would be a huge boon for cannabis investors. However, it faces a serious uphill battle. To pass in the senate and become federal law, it would need every Democratic vote, plus 10 Republicans. With the two parties fairly divided on the issue of legalization, it’s unlikely the MORE Act will pass — especially in its current form.
The CAO Act
There’s another cannabis legalization bill being drafted in the Senate. The Cannabis Administration and Opportunity (CAO) Act would end the federal ban on cannabis. It would also offer state-compliant cannabis businesses access to modern financial tools, like seeking out business loans or utilizing credit card transactions. (Most credit card companies won’t touch cannabis, even in legalized states.)
Unfortunately, the CAO Act faces the same legalization hurdles as the MORE Act. That makes it somewhat unlikely that it will become law in the United States. So if the federal legalization of cannabis products isn’t going to be on the table, what does that mean for related stocks and investments?
The ‘New Green’ Stocks
Let’s start with our general disclaimer. We are not professional financial advisors. We cannot predict the stock market. If we could, we wouldn’t spend our days writing for a financial blog. So while we will give you the best information we possibly can, you should not consider anything we say as official financial advice.
A whole host of cannabis related stocks have cropped up in recent years. Some are farming relaated, doing the growing and harvesting of the plants. Others are related to the processing, product creation, and sales of cannabis products. You can even invest in cannabis-related exchange-traded funds (ETFs). Many of them have shown a lot of short-term growth, giving investors hope for the long term.
You should not forget that the regulated cannabis business is basically still an infant. It’s only existed for about seven years so far. In comparison, publicly traded companies like Ford have been around for over a century. That means things are still fairly uncertain and subject to future adjustments or shifts. The same can be said about any business, really, but cannabis companies may have to be especially nimble, considering their lack of history and grey-ish legal situation.
The cannabis industry is facing a few serious drawbacks that keep investors uncertain. Let’s go over the main risks that skeptical investors cite when choosing to stay away from cannabis stocks.
Cash Only, Please
Until very recently, cannabis was criminalized almost everywhere. That meant it was a cash-only business. That same cash-only operating model made the cannabis business ripe for money laundering schemes. That stain remains, even on legitimate and regulated cannabis businesses.
There are many banks and financial instructions that still refuse to deal with the cannabis industry. That means you can’t pay with a credit card and the business owner might not even be able to get a corporate bank account. They likely can’t get access to business loans or capital improvement investments.
Don’t forget that the legalization of cannabis is a slow and inconsistent process. There are still plenty of states (and countries) where it remains illegal. That puts legitimate operators up against a wall when it comes to expanding their business reach.
We’ve already linked to a couple sources that show that cannabis hasn’t been proven to be any more dangerous than alcohol or tobacco. Or living off a steady diet of Coke and BigMacs, for that matter. However, just because it’s not more dangerous than those things doesn’t mean it’s perfectly safe.
There is at least one notable study, by Dr. Marco Leyton, that points out the growing evidence that links habitual cannabis use in as an adolescent with symptoms of psychosis. Of course, legal cannabis is not intended for underage users. However, that doesn’t seem to stop 17-year-olds around the country from getting their hands on a six-pack on Friday nights.
Since the legal cannabis industry is extremely new, some investors worry that future health and safety concerns will pop up. A major safety issue would wreak havoc on the stock prices of cannabis growers and sellers.
Every investment has potential downsides and upsides. We’ve covered some of the downsides, so let’s talk about why many investors are feeling very bullish on cannabis stocks. The most obvious upside? Society is changing. Cannabis is no longer some mystery feared substance causing suburban housewives to clutch their pearls and shout “won’t somebody please think of the children!?”
Cannabis has been used by humans recreationally for thousands of years. It’s medical purposes continue to evolve. Even those who have no desire to partake themselves are often accepting of legalization efforts. Younger generations are simply more accepting, which means that further legalization efforts are likely — both federally and in states still without new laws. In fact, close to 70% of Americans are in favor of the outright legalization of cannabis.
Today’s cannabis products aren’t being grown in some hippy’s dusty garage. It’s a major agricultural crop, complete with technological innovations to increase yields and improve the product. It’s not just the growing process that sees innovation either.
Cannabis can now be consumed in a wide variety of ways, and it’s all legal (in most places, anyway). You can get edibles, candies, gummies, baked goods, beverages, vape cartridges, and pretty much anything else you can dream of. These innovations drive sales even to the segment of the population that feels too old or too “uncool” to spark up a joint.
One of the biggest potential upsides about cannabis stocks is the diversity. It’s not just companies who engaged in the farming of the plant. There’s plenty of biotech companies who specialize in research, cultivation, distribution, and even cannabis derivative products (CBD oils and other other medical purposes).
There are also companies who merely support the industry, like those who design and sell hydroponic growing systems or develop commercial retail spaces for cannabis shops. You can even hedge your bets with cannabis ETFs. These are a smart way to invest in the growing cannabis industry without the stress of trying to pick individual stocks.
The Bottom Line
It looks like legalized cannabis is here to stay. However, until the federal government officially endorses society’s growing acceptance, some investors remain leery. So what should you do? Like most things related to the stock market, it’s hard to know for sure.
You could invest now, and see impressive gains as the industry grows, becomes even more legal, and spreads to new states or countries. On the other hand, you never know how the next round of elections might end up. If the Republicans end up back in the White House, the legal cannabis business could take massive hits. In the worst case scenario, it could get shut down entirely if some politician insists that the federal government merely enforce the laws as they currently exist.
As with any speculative investment, you shouldn’t put in more than you’re willing to lose. But legalized cannabis is definitely a huge emerging industry at the moment. It’s worth keeping on eye on.