The Impact On Investments From Marijuana's Legalization

By Jeff Remsburg, Contributing Editor InvestorPlace.com Apr 8, 2019, 7:13 pm EDT

Where we stand with federal marijuana reform initiatives, and what that means for your marijuana investments today

With last Friday’s “landmark” bill, Congress is closer than ever to long-awaited reform measures that would, in effect, legalize marijuana.

“Landmark” is how Rep. Earl Blumenauer (D-OR) described the legislation introduced this past Friday. If passed, it would end the federal prohibition on marijuana.

The legislation is called the STATES Act (Strengthening the Tenth Amendment Through Entrusting States). In practical terms, it would allow each state or territory to decide its own policy on marijuana, without federal intervention.

(You can follow all the proposed legislation here)

It will still be a while before the bill gets a full House vote. Regardless, the momentum and growing support from an increasing number of politicians are what’s important for now. It’s part of a new wave of legalization that has already created massive stock winners. At this point, it’s undeniable — legal marijuana is one of the biggest investment opportunities of this generation.

So, given this federal milestone, in today’s Digest, let’s review federal marijuana reform efforts that have taken place over the last few months. Then, in light of where we stand today, let’s discuss which investments are likely to thrive in this environment.

***Major federal reform began with the passing of the 2018 Farm Bill this past December

The Farm Bill was major news for marijuana investors. To understand why, I’m going to turn to our resident marijuana expert, Matt McCall. Matt is one of the most respected, and successful, marijuana analysts in the business.

The bill legalized hemp — a cannabis derivative — for the first time in nearly a century, opening up what could be a $20+ billion industry in a relatively short amount of time. As hemp-derived cannabidiol (CBD) oil hits the mainstream, we’re looking at an industry with the potential to be 55 times larger in just five years … it has game-changing ramifications on the hemp industry …

Prior to that, hemp was classified as a Schedule 1 drug according to the Drug Enforcement Administration (DEA), and federal laws prohibited growing or selling it. A previous Farm Bill from 2014 allowed a few states to give out limited permits to grow hemp for specific uses, but it mostly remained illegal.

The DEA’s classification made no sense. Schedule 1 drugs are the most addictive and dangerous in the world and have zero medical benefits. We know that isn’t true with hemp. Can you believe that the DEA viewed hemp as more dangerous than cocaine, which is a Schedule 2 drug?

Given this hemp legalization, we’re now seeing CBD-infused products being sold in traditional outlets including Walgreens and CVS. Beyond that, CBD has already become so popular it’s making its way into products you may never have suspected — for instance, CBD dog treats.

This CBD-popularity dovetails into the second area of federal reform — the FDA.

***While the conversation is evolving, real reform from the FDA appears slow … but moving

While CBD made from hemp is now legal thanks to the 2018 Farm Bill, CBD made from marijuana is still illegal. That’s because marijuana remains a controlled substance.

The lack of formal guidance from the FDA has led to lots of confusion as to which CBD products are legal versus illegal, as well as marketing claims and general advertising. This has slowed CBD’s growth (even though its current growth is staggering despite these challenges).

During one of his last days as FDA commissioner, Scott Gottlieb appeared before a House appropriations subcommittee and explained the challenge. In essence, regulating CBD will require a unique model that may take years to complete.

“That’s the conundrum here,” he said. “We don’t have a really modern proxy for where this has happened.”

That’s why Gottlieb suggested that congressional action on CBD could lead to a faster resolution than paths through the FDA.

But in an effort to push the ball forward, the FDA will hold its first public hearings on whether to allow CBD to be legally used as a food-and-drink ingredient on May 31.

If you want to be a part of this conversation, the agency is asking for public comment. If you’d like to learn more and have your voice heard, click here for more information.

***Another key piece of federal reform is happening with the SAFE Banking Act

On March 28th, a congressional committee approved the Secure and Fair Enforcement (SAFE) Banking Act. The legislation is intended to increase marijuana businesses’ access to banks.

This is big because with marijuana still illegal under federal law, getting banks to accept deposits from marijuana-related companies is extremely difficult. That’s because any bank that does business with marijuana companies could be charged with “aiding and abetting” — which is a federal crime.

In order for the marijuana industry to make its next quantum leap, banks need to be in on the game. And last Thursday’s vote from the House Financial Services Committee is evidence that’s happening.

The vote is also significant since it was approved despite some resistance from Republicans. You see, when Republicans held the House majority, they blocked marijuana amendments from even being considered.

Even last week, top Republicans on the Financial Services Committee requested to delay the vote, given some unanswered questions. The vote went ahead and was passed despite this request, which is a reflection of the chamber’s new Democratic majority.

When the legislation will reach the floor is unclear. But if passed, federal banking regulators will not be able to punish financial institutions just because they service marijuana businesses that enjoy legal status under state or local law. That will be a watershed moment for the legalized marijuana industry.

***Coming full circle, given the status of these various federal reform efforts, where do we see the most impact on investments?

Marijuana is still illegal on the federal level. So, as you would expect, the investments seeing the biggest gains are those that have less risk of federal prosecution. CBD falls into this area, despite the current murkiness surrounding its FDA approval. Given this, many CBD stocks are exploding.

Matt’s own Elixinol is one example. Elixinol makes and distributes CBD supplements and skincare products. At the time of this writing, Matt’s subscribers are up over 175% since December.

So, CBD companies should be on your radar if you’re looking to begin a portfolio of marijuana investments.

A second marijuana investment area that has some insulation from federal repercussions is found in “picks and shovels” companies — in other words, companies that provide services to the marijuana industry, but don’t directly participate. For instance, a company that provides fertilizer and production equipment to a grower.

The example from Matt’s portfolio is Innovative Industrial Properties (IIPR). It’s a REIT which buys properties from medical marijuana growers, then leases the buildings back to the growers. At the time of this writing, Matt’s subscribers are up over 150% since August.

As to pure-play marijuana companies, such as those that sell marijuana directly to consumers, we expect they’ll thrive in the coming years after full federal legalization. But until that happens, we anticipate outperformance from these “safer” marijuana plays.

That said, if you’re looking for huge investment returns, the time to invest is usually before the crowd piles in. That means an investment in more direct marijuana companies today could pay off huge tomorrow.

If you’re looking for help identifying marijuana investments, Matt will be hosting his first-ever Cannabis Stock Summit where he will explain the area he’s most excited about right now. It’s based on a strategy that targets a specific type of marijuana company positioned to benefit from a unique market event. Click here to learn more.

In the meantime, we’ll continue to keep you up to speed as to the status of federal reform as 2019 unfolds.

 

Debra Borchardt

Debra BorchardtDebra Borchardt

Debra Borchardt is the CEO, Co-Founder, and Editor-In-Chief of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Masters degree in Business Journalism from New York University.


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