Right now, marijuana is a highly politicized industry, one heavily regulated by many governments, including the federal government of the United States. Over the next decade this will dramatically change. We’re seeing a tidal shift in marijuana regulations at the state level. States are decriminalizing marijuana, legalizing “medical marijuana,” and in some cases are legalizing recreational marijuana.
This shift in criminal law at the state level is causing a disconnect between federal law and state law. Ultimately, the federal government will have to…
shift its laws to match criminal laws in the states. Meanwhile, however, federal regulations are causing bottlenecks in the marijuana industry. For instance, banks are not allowed to loan marijuana companies money under federal law. Many of these pot start-ups are starved for cash.
Innovative Industrial Properties (NYSE:IIPR) is addressing this pain point by is financing much of the marijuana industry in the United States. And by doing so, the company has now become the largest owner of marijuana acreage in the U.S. This dynamic will make IIP the strongest pot stock over the next 10 years.
What causes the demand for marijuana?
To understand where the cannabis market is headed and why, you need to first understand what’s in the plant itself. Cannabis contains over 500 distinct chemical compounds. The two best-known ones are delta-9-tetrahydrocannabinol (THC), the compound that makes you high, and cannabidiol (CBD), which might have medically useful properties (and does not make you high). To be blunt (sorry for the pun), THC is why marijuana was a crime for so long, and THC is why there is such high demand for marijuana.
What about CBD? Brightfield Group, a market research company, predicts that the CBD market will double every year and hit $23.7 billion in four years. This bullishness is based on the fact that the federal government has recently legalized hemp (from which CBD can be derived). But it doesn’t follow from this that there will be sky-high demand for hemp products or CBD.
While the Food and Drug Administration has approved one CBD drug — Epidiolex from GW Pharmaceuticals (NASDAQ:GWPH) — there is also evidence that CBD causes liver damage. The FDA can and will crack down on any claims that CBD improves your health. Efficacy has to be proven, as does the chemical’s safety profile.
Investors should probably focus on marijuana stocks and not get sidetracked into hemp stocks. The demand for marijuana is obvious — people like the high they get from THC. It’s analogous to the buzz people get from alcohol or tobacco. In 2019, the market for alcohol in the United States was $250 billion. Tobacco is about a $115 billion market. Those two sin stocks are a good proxy for how large a market cannabis could become.
Sin is a big business
The upside for marijuana is huge. Right now marijuana is a far smaller market than alcohol or tobacco, because marijuana is a controlled substance — it’s illegal under federal law. However, at the state level (where most criminal laws are made), the rules about marijuana are in serious flux. And it’s very clear that the overall trend is toward full legalization.
Here is a pretty good map (updated monthly) about the status of marijuana laws in all 50 states. So far, 11 states have legalized recreational marijuana. And 31 additional states have either decriminalized marijuana, or now allow for medical marijuana, or both. Only eight states, and the federal government, have refused to budge.
Because marijuana remains illegal under federal law, right now banks cannot provide financing to marijuana companies. Many marijuana companies that are publicly traded raise funds through…
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