Several essential facts to know before investing in the US legal cannabis market

By @chelean on
medical marijuana cannabis
Marijuana plants are examined under a magnifying glass at Ganja Farms marijuana store in Bogota, Colombia, January 7, 2016. Reuters/John Vizcaino

Legal marijuana is now legal in Australia, whereas in the US, there are now 23 states that have made cannabis for medical purposes legal. Four other states have already decriminalised it for recreational use. However, the number still clearly says that the US legal cannabis market is far from being nationwide, and that it is still smaller compared with other established industries in the country.

Nonetheless, its growth is undeniably fast, and the market potential is highly promising. More politicians and organisations are advocating its legalisation, citing success stories in lessening crime rate and increasing market profitability of the first states that gave it a go. Investors are now seeing its worth, which is helpful in changing the overall perspective on the once-prohibited industry.

It’s a perfect target industry for investors looking for nascent businesses that could become bigger—as it is already considered immense this time—in the near future. According to market analytics provider and independent finance firm Ackrell Capital, the market could surpass the US $100 billion (AU$130 billion) mark by 2050 if all states in the country finally give its legalisation a green light.

Marijuana Business Daily’s report is a bit more encouraging, though. According to its latest study, the US$44 billion (AU$57.4 billion) market value could be reached easily if present rules and trends remain intact. Market research firm ArcView Research, however, has a more conservative prediction at US$21 billion (AU$27.4 billion) mark in the same year, that is, if all states will emulate the first 23 states’ move.

Although these reports don’t share the same opinion when it comes to numbers, they are all still in harmony when it comes to its future. They all believe that the legal cannabis market will experience more growth as entrepreneurs and investors tap on its still-untouched potential and as it becomes an essential segment in the medical industry.

Moreover, the number of companies going public every day is also rising. According to Bloomberg, even industries that have nothing to do with marijuana have jumped on the bandwagon to get a slice of its success, making the industry more immense and attractive to other outside-industry markets.

"The pot companies are an eclectic mix. Pharmaceutical businesses have been the most successful so far. Some produce medical marijuana; others are hedging by investing in hemp- or cannabis-based drugs to treat pain and fibrotic diseases. Marijuana growers make up the second largest segment. And two tech companies are developing breathalysers for pot smokers," stated Bloomberg in its Week Index.

The present leader in the publicly-traded marijuana stocks segment are GW Pharmaceuticals, which has a current market value of US$2.2 billion (AU$2.7 billion), and Insys Therapeutics, which is now the largest US cannabis stocks at US$2.4 billion (AU$3.1 billion). Most stocks, however, are traded on the over-the-counter (OTC) exchanges, unlike GW and Insys that both trades on NASDAQ.

There are also upcoming companies like Med-X, which has recently launched a crowdsourcing campaign on StartEngine to widen its reach and capabilities in conducting more-in-depth studies on the nascent industry. The company shows promise in terms of becoming a top-producer of high-quality cannabis products in the future — which may attract meticulous marijuana enthusiasts and health-conscious investors — as it thrives on its being a research-focused brand. The company has been gaining a large amount of attention for its advocacy on changing the public’s negative notion on marijuana. It also has a media arm, The Marijuana Times , where it publishes articles, stories, and news about the medical plant.

A little quandary in legal marijuana investing might be its size, as not everyone has already seen its potential, or at least willing to collaborate with marijuana-focused firms. For instance, most banks these days are still avoiding marijuana firms, which means access to basic banking services could be a problem.

"Because the federal government still views the plant as illegal, banks believe that lending to marijuana businesses, or even accepting deposits in the form of a checking account, could leave them exposed to criminal prosecution from the federal government. If medical marijuana-based businesses do not have access to capital, it could severely hamper their expansion plans,” said Motley Fool finance journalist Sean Williams.

Williams also explained that cannabis businesses are paying tax on their gross profits instead of their net profits, and despite being legal in their state, federal law remains on top of state tax law. According to the Section 280E of US tax code, sales from “illegal drugs” will not enjoy deductions on tax rates against their gross revenues. This costs a company a sizeable deduction from their profit, which could also affect stock prices and even market value.

Indeed, there are still a lot of things expected to happen in this blossoming market. Politically speaking, for example, a Republican president after Obama could affect other states’ legalisation plans as both GOP candidates are against it, save for Trump, who has constantly changed opinions on the matter, according to the Daily Caller. Sanders and Clinton, both in favour of a marijuana-legal America as long as it’s only for medical use, could also expand the market should they win the coveted position.

Like any other market, though, it has an uncertain future. No one knows if it’s still bullish next quarter or if it’s already bearish next year. What experts always say is that thorough research should always precede putting money on stocks, however big and popular the company is.

At the end of the day, the legal cannabis market, though undeniably inchoate, remains small, which means there are still more rooms for improvements and changes. Hence, it is far from demise, and its expected destination is advance, growth and inevitable expansion.