How Governments Are Getting in the Way of Marijuana Stock Gains, and How to Fix It

Marijuana Sales Can Be Higher

With recreational marijuana now legal in 10 U.S. states, D.C., Canada, and Uruguay—alongside a host of other regions around the globe both formally and informally—marijuana sales are what every investor and analyst should be watching.

With quarterly reports that now have the possibility to be cash-flow-positive, profitability (and the extent of that profitability) is going to be a huge determinant of just how high pot stocks can climb. That being said, we need governments to help those sales rather than harm them.

Right now, regulation is far too burdensome in a variety of states and countries.  I’ve written extensively about how onerous regulation in Canada is slowing sales. Not crippling them, mind you, but certainly getting in the way.

And now information has come out detailing how major California farmers are actually suffering under the legalization of recreational marijuana. (Source: “How Legal Weed Is Killing America’s Most Famous Marijuana Farmers,” POLITICO, June 4, 2019.)

The fact is, things are going to be muddy during marijuana’s transition from illicit drug to legal product.

Lawmakers have to balance safety and sane regulation with companies being able turn a profit and governments being able to yield decent returns via taxes. And they need to do all this while competing with a robust and established black market.

It’s a tall order, no doubt, and one that does not have an easy solution.

A big part of the problem is that marijuana stocks are also contending with regulatory burdens that are simply too much to handle when weighed against the very low overhead of the black market.

After all, the black market only has to contend with avoiding law enforcement. Beyond that, it can use the most efficient and cheapest mechanisms to grow and distribute pot.

In that uneven system, we’ve seen marijuana being sold for far less on the black market than on the legal one. Furthermore, the increasing acceptance of marijuana as a legal good has reduced the overhead costs for black market distributors, because being caught with marijuana now carries far less legal difficulty.

And all this is building into a real headache for legal marijuana companies, which are trying to sell as much pot as possible and don’t need over-regulation getting in the way.

So what’s the solution? If we want to see marijuana stocks truly soar and reach their potential, then regulation needs to be reduced to a reasonable level so that the legal industry can compete with the black market. Until that happens, the illegal side of the trade will continue to see a lot of activity.

While there absolutely needs to be a number of health and safety checks, things like specific shipping laws and highly expensive licensing fees can be reduced—at least at the start—while the legal market tries to muscle out those who operate outside the law.

It won’t be easy, but those are simple, easy steps that can get the business cooking at a faster rate. Not to mention that it will help net increased revenue for the legal companies, thereby helping juice marijuana stocks.

Analyst Take

Reducing the red tape around the marijuana trade is a win-win. Not only will it help reduce the money that goes to illegal operators, but it will also help the legal companies establish a foothold in the industry and speed along the transition.

It has been done before, back when alcohol was prohibited in the U.S., only to return to legality years later.

All it takes is a realistic reassessment of the marijuana industry and well-thought-out laws that strike a balance between safety and cost. It starts with the understanding that marijuana continues to be one of the safest drugs for consumption on the market. Common-sense laws will help keep it that way while also boosting the legal side of the industry.