The Non-Smoking Future of Legal Marijuana
Collective progress can feel like an oxymoron in a politically and ideologically divided country regularly split in two competing camps. This makes the rather swift transformation of both beliefs and laws surrounding marijuana in the U.S. extremely encouraging, even though it’s still illegal at the federal level.
Marijuana was classified as a Schedule I drug in 1970 when Congress passed the Controlled Substances Act. The fact that fifty years later cannabis remains in the same category alongside heroin and LSD might seem discouraging. The greener side of the coin focuses on the stunning progress made in the face of marijuana’s federal classification.
The tides began shifting in the 1980s and 90s and in 1996 California voters approved Proposition 215. We won’t get bogged down in legal jargon, but the bill titled The Compassionate Use Act of 1996 essentially kicked off the modern medical marijuana movement.
Less than 20 years later, Colorado and Washington approved adult-use recreational marijuana measures in 2012. The floodgates are now open, with 18 states, two territories, and D.C. having all enacted legislation to regulate legal recreational cannabis for adult use, according to the National Conference of State Legislatures.
Connecticut, New Mexico, Virginia, and New York all joined the legal recreational marijuana ranks in 2021 alone. More states could possibly hop on the legalized recreational pot train later this year. Crucially, the quickly expanding group of states covers different political leanings and geographical regions, ranging from Illinois to Arizona.
Adult-use lags the much larger medical space. At the moment, 37 states and four territories have legalized cannabis for medical purposes. The rapid adoption of medical and recreational use means a majority of Americans currently live in states with some legal marijuana and nearly 45% of U.S. adults now live in a jurisdiction that has legalized the recreational use of marijuana at the local level.
Elsewhere, Mexico's Supreme Court made private and recreational marijuana use legal in June of this year, though specific details of that legislation are still a bit unclear. These efforts would see the U.S. sandwiched between two of only a few countries in the world—and by far the largest—to legalize recreational marijuana on the national level, after Canada did so in 2018.
Canada was the first Group of Seven country to legalize adult-use recreational marijuana on a national level. The move came five years after South American country Uruguay legalized in 2013. Many other countries have adopted some form of medical cannabis legalization. A total of 47 out of 196 countries have some variation of legalized medical cannabis on the books, according to a recent study.
A Nation Speaks
Polling numbers paint a straightforward picture of progress. A November 2020 Gallup poll showed 68% of U.S. adults are in favor of marijuana legalization. The figure is up from around 50% in 2012 and roughly 30% in 2000. This poll highlights the dramatic shift, and just think how difficult it is to find anything 70% of all American adults agree on in a largely 50/50 country.
Gallup’s figures weren’t a fluke, after an April Pew Research poll pointed to similar attitudes. Overall, 91% of U.S. adults say either marijuana should be legal for medical or recreational use, with 60% in favor of full adult legalization and 31% for medical purposes.
These numbers are poised to head higher since younger people in the U.S. are more heavily in favor of legalization, with 80% of people 18-29 saying yes weed should be legal and 75% of those between 30-49. Plus, a clear majority of older Americans are in favor of legalization: 60% between 50-64 and 55% for 65+.
Despite the groundswell of support, it’s unclear exactly what federal marijuana legislation will look like, with various bills floating around Washington at the moment and over the last several years focused on different aspects. These bills include the SAFE Banking Act (Secure and Fair Enforcement Banking Act of 2021), the MORE Act (Marijuana Opportunity Reinvestment and Expungement Act of 2019), and one of the new efforts: the Cannabis Administration and Opportunity Act.
Complexities and Beltway partisanship make it difficult to predict when legalization will occur. However, given the grassroots support and continued state by state push, it seems like only a matter of time before some type of federal legalization occurs because politicians will eventually follow the polling data and the money.
Follow the Money
U.S. sales of medical and adult-use marijuana reached roughly $20 billion in 2020, up around 50% from 2019. Before we move ahead, potential pot stock investors should know the numbers and projections vary, sometimes significantly, since the industry is new, nearly 100% cash-only in the U.S., and somewhat ad hoc.
Other widely-cited figures show legal sales surged 46% to a record of $17.5 billion in the U.S. last year. Meanwhile, the global market is projected to climb from around $22 billion in 2020 to nearly $100 billion by 2026, with an annual CAGR of 28%. A different legitimate data set expects sales will rise from $24.6 billion in 2020 to over $97 billion by 2026.
Given the speed at which the industry is evolving, these estimates may be conservative. For instance, another projection, cited by a large publicly traded marijuana company, valued the global cannabis market at a whopping $186 billion in 2020 and projected it will reach $300 billion by 2030, for a 28% CAGR.
Going more granular, on a state-by-state basis might be more prudent at the moment. Total marijuana sales in Colorado—one of the most mature legal markets in the country—hit $2.2 billion last year, according to the state’s Department of Revenue. This represented 25% sales growth against 2019 and 42% vs 2018.
The largest U.S. legal market, California, saw cannabis sales surge 57% from $2.8 billion in 2019 to hit $4.4 billion in sales. The most populous state collected about $817 million in adult-use marijuana tax revenue last year.
Elsewhere, Illinois officially began recreational marijuana sales in January 2020 and revenue hit $669 million last year. Total sales including medical reached over $1 billion and recreational sales alone are projected to climb over $1 billion in 2021, representing at least 40% growth.
All of this growth occurred amid a federal ban and somewhat convoluted local regulations, with limited licenses available. Imagine the growth potential when federal legalization happens in the U.S. and beyond.
Continued . . .
Ready for the Pot Stock “Gold Rush”?
The Senate is on the brink of legalizing marijuana at the federal level after the Senate Majority Leader introduced draft legislation. 37 states have legalized medicinal marijuana. 18 states have made recreational use legal. With the passage of the Cannabis Act in 2018, it’s now legal in Canada. Mexico's Supreme Court made private and recreational use legal in June of this year, though specific details of that legislation are still a bit unclear. As a result of these developments, companies within the space are about to take off. Global sales are predicted to skyrocket from $24.6 billion in 2020 to an expected $97.35 billion by 2026.
Zacks recently closed marijuana stock trades of +147.0%, +39.7%, and +94.5% in as little as 3 months,¹ and is currently riding a triple-digit gain that should still have a long way to run. Plus, new stocks are being lined up that could rival or surpass these performances.
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Cannabis cultivation dates back thousands of years, with plants growing naturally in various regions of Asia and other parts of the globe. Uses have varied over time from herbal medicines to utilizing hemp to make textiles and rope. Today, marijuana cultivation is a science, grown in mass quantities in industrialized lab settings in Canada, the U.S., and other places with legal markets.
The two most widely known and used cannabinoids are Cannabidiol (better known as CBD) and Delta-9-Tetrahydrocannabinol (or THC). CBD is the non-intoxicating, non-psychoactive side that provides anti-inflammatory and analgesic effects, as well as other health-focused claims such as better sleep. THC, on the other hand, is the main mind-altering, psychoactive chemical in marijuana, which also releases the same medical benefits.
Lighting dried marijuana on fire and smoking it was often the most common way to consume THC and marijuana. With cannabis out of the shadows, people and companies refined existing methods and invented different ways to use the plant.
Chemists, botanists, food scientists, and many other industry professionals determined how to precisely extract THC and CBD from the cannabis flower and turn it into oils, concentrates, and extracts. These efforts have birthed vaporized offerings, tinctures, ingestible oils, topical creams, beverages, and edibles.
Edibles and non-smokable marijuana alternatives often take longer to activate in the body. But the medical-grade products sold in legal markets are clearly labeled with ingredients, cannabinoid levels, dosage recommendations, and more.
Cannabis products are required to be tested and labeled for the amount of THC and CBD they contain. Cannabis infused edibles are catching on quickly in legalized and regulated markets, where people know what they are buying and how much THC is in what they are ingesting.
Marijuana edibles have come a long way since the stereotypical pot brownies. Edibles come in all shapes and sizes, from gummies in every imaginable flavor to chocolates and mints and beyond. These offerings also come in a range of price points, quantities, and potency, allowing people to take as much or as little as they want.
The next frontier is likely to focus on faster-acting edibles to help reduce the inherent lag time between ingestion and impact. Companies are also pursuing different dosage levels, with various offerings ranging from 1 milligram mints contained in larger packaging to 100 milligram chocolate bars for which users are able to pick their quantity and or dosage.
The legal shops—often with a high-end boutique feel—are full of friendly and knowledgeable employees. The store associates are able to offer tailored advice geared toward a user’s experience and preferences.
The broader edibles and non-inhalable space includes beverages such as soda, tea, sparkling water, and beer. Some companies even sell small liquid packages to be placed directly in the mouth or used to create a THC/CBD infused concoction out of your drink of choice, from smoothies to cocktails.
Potentially Healthier Options
The edibles space provides people a comfortable, effective, and extremely discreet alternative to smoking. Many people are rightfully concerned and conscious about the potentially negative impacts of smoking anything, whether it be a joint, a pipe, or a modern vaporized offering similar to e-cigarettes.
Covid-19 likely caused more people to be concerned about their respiratory health and hesitant to share something that touched someone else’s mouth. These trends could linger well after the pandemic and then simply become commonplace.
Edibles cater to people who want THC and those looking for non-psychoactive CBD products, as well as hybrid CBD/THC offerings. Progression and growth in the medical market is natural since most patients utilizing marijuana for medical purposes should likely avoid smoking. The ease of use and ability to offer the same pain and nausea management and other benefits in a specified dosage, without having to inhale anything is sure to be a hit.
Canada didn’t legalize cannabis edibles until a year after it first legalized recreational marijuana in the fall of 2018. Canadians purchased $87 million worth of recreational cannabis edibles in 2020, which was the first full year they were available. Edible sales slowly grew quarter by quarter and still accounted for only 4% of all regulated cannabis sales last year. And one of Canada’s biggest pure-play pot companies didn’t even launch its first medical cannabis edibles, available in THC and CBD-rich varieties, until early August of 2021.
Edibles are coming off a banner year in the largest U.S. recreational market, according to a year-end report from California-based marijuana delivery business Eaze. Edibles ended the year as the #1 category on its platform, grabbing 22% of all sales, with edibles ranked as the most popular product line in San Francisco, Los Angeles, and San Diego ahead of flower and vapes.
Another end of year report from Seattle-based cannabis analytics firm Headset said sales of adult-use and medical edibles surged by 60% across seven state markets (California, Colorado, Massachusetts, Michigan, Nevada, Oregon and Washington). This outpaced the growth of the overall market’s 54% climb and helped edibles increase their market share to over 11% last year.
An expanding consumer base supports the broader industry growth. A total of 49% of U.S. adults have tried marijuana, up from 45% in 2019, according to a mid-August Gallup poll. Meanwhile, 12% of U.S. adults say they smoke marijuana, with it more popular among younger cohorts. The current market of active adult cannabis smokers sits at around 30 million, based on the latest U.S. population data.
The number of people trying and actively using marijuana is sure to increase as more states legalize. The ability to buy a regulated product at a store is far more appealing to most people than buying it on the black market.
Illegality is clearly a huge deterrent to many. And the 12% figure could be underreported for a variety of legitimate reasons. Logic also suggests tons of people might not want to smoke anything, not even newer vaporized offerings marketed as healthier alternatives, providing ample runway for legal cannabis edibles, beverages, and more.
Pure-Play Pot Stocks
The ability to bring new people under the legal marijuana umbrella is vital for the long-term growth and eventual sustainability of the industry. Edibles appear ready to thrive and data suggests both new and mature consumers are trying edibles for the first time, driven by increased availability and a growing smorgasbord of products.
The ability to consume healthier, non-smokeable products that are inherently more discreet is a winning pitch. This is why companies are investing heavily to ramp up production and create variations and new products, appealing to as many different consumers as possible, from basic staples like gummies to foodie-level offerings to pair with certain meals or beverages.
A few Canada-based firms, which trade both in Canada and on the NYSE or NASDAQ, are currently dominating the market and have positioned themselves to explode into the U.S. as soon as federal legalization occurs. Many of these large, established touch-the-plant firms have dozens of brands under their tents, including recognizable non-weed names in the sports drinks and alcohol market that could eventually roll out THC and CBD fusions.
Pure-play pot stocks operate in a competitive space akin to other consumer packaged goods staples from seltzer water and salsa to alcoholic beverages, where marketing, branding, and packaging are paramount. There will be Budweisers and Coca-Colas of marijuana and edibles, and a few names in the space are positioned to become household names, boosted by mergers and investment from established, publicly traded non-pot companies.
Share prices of the exchange-listed cannabis stocks have already experienced several boom-and-bust periods. The past 12 months encapsulates some of the current volatility. Many pot stocks soared following the November election on the hopes a Democrat in the White House would speed up federal legalization efforts.
The run exploded after the Georgia Senate runoff sweep. Unfortunately, marijuana stocks then got caught in the meme stock mania and skyrocketed far too quickly nearly overnight. This led to an equally fast selloff.
The recent beatings and underperformance don’t spell doom and gloom. Instead, the non-fundamental based moves in 2021 present ample opportunities to buy many strong stocks at levels they were trading at last fall.
Legal marijuana, cannabis, pot, or whatever your preferred nomenclature is still in the early days despite the notable expansion and sales growth over the past several years. America and many parts of the world are turning greener by the day and investors will be able to cash in if they know where to look, especially since there might not be smoke to spot.
The Easiest Way to Pursue Big Profits
At Zacks, we're monitoring political developments very closely as well as tracking individual stocks. The Senate is on the brink of legalizing marijuana at the federal level after the Senate Majority Leader introduced draft legislation.
37 states have legalized medicinal marijuana. 18 states have made recreational use legal. With the passage of the Cannabis Act in 2018, it’s now legal in Canada. Mexico's Supreme Court made private and recreational use legal in June of this year, though specific details of that legislation are still a bit unclear. As a result of these developments, companies within the space are about to take off. Additionally, new ones will emerge and current stocks could skyrocket.
For investors, this presents a huge opportunity.
This space looks to explode from $24.6 billion in 2020 to $97.35 billion by 2026. Yet only a few growers, pharmaceuticals, financial firms, suppliers - both established and start-ups - are the true innovators and offer exceptional profit potential.
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For Zacks, Ben Rains focuses on large-cap technology companies and consumer-facing stocks. He currently helms the Marijuana Innovators trading service, searching for the latest strategies to expose investors to the growing legal market in the U.S. and beyond. Ben uses his extensive experience and concentrated industry study to help direct our unique portfolio service, Zacks Marijuana Innovators.
¹ As of 8/30/2021. The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.
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