By Gaurav S. Iyer, IFC Published : April 7, 2017
Should You Consider Marijuana Stocks Under Trump?
While it’s unnerving to see marijuana in Donald Trump’s crosshairs, investors should understand that healthcare, trade, and the budget are higher on the president’s policy agenda. “Trump vs Marijuana” is a lower-priority fight, at least from the administration’s perspective.
The upward trend (which has delivered 500%+ returns to investors) is expected to continue for marijuana stocks in 2017. We’ve come to this conclusion after months of research and analysis.
Nothing we’ve reviewed suggests that marijuana legalization is in any danger. In fact, the underlying trends are on track with earlier predictions. So don’t buy into the conventional wisdom. It is tainted by bias—a bias towards conservative forecasting.
I’ve seen financial writers scale back their bullishness because they’re scared of looking crazy. Even after crunching the numbers, after showing that the trend is real, some analysts prefer to shy away from bullish predictions. They’re terrified of taking a chance.
The same thing is true for marijuana stocks in 2017. Just take a look at the analysts arguing that cannabis is stifled by “political risks.” It’s a red-herring. Those statements exist for the sole reason of making their analysis look “even-handed.”
If that isn’t the reason they’re bearish on marijuana stocks, then they simply don’t understand politics. A majority of Americans support marijuana legalization. Plenty of Americans have used marijuana in the past, and many of them continue to use to this day.
More to the point, marijuana companies bring home the bacon.
They provide a huge tax boost to state governments, not to mention jobs for the people working in those states. In other words, there will be a political cost for hurting the marijuana industry and pot stocks, either in the form of votes or campaign donations. No one wants to be first to pay that cost.
Evidence suggests that marijuana stocks will continue to rise during the Trump presidency.
If you’re still not convinced, here’s a list of three ways that Donald Trump could hurt marijuana stocks. After each reason, I have explained why analysts are overweighting this “political risk.”
1. Order His Attorney General to Overrule the States
A lot of pot stocks took a beating when Donald Trump nominated Senator Jeff Sessions as his first attorney general. Sessions is notoriously hostile to marijuana legalization. When he was still representing Alabama in the upper chamber of Congress, Sessions said, “Good people don’t smoke marijuana. There is more violence around marijuana than one would think.” (Source: “Senators held a hearing to remind you that ‘good people don’t smoke marijuana’ (yes, really),” The Washington Post, April 5, 2016.)
Many people took this to mean that he’ll roll back protections on marijuana. Right now, the federal government turns a blind eye toward states that have legalized pot. The federal government lets them make the final decision. But Donald Trump can change that in a second.
All it would take is one directive to Attorney General Sessions to shatter the legitimacy of cannabis-related companies. The federal government can overrule the states, send in enforcement agents, and prosecute anyone who continues to sell marijuana.
After all, marijuana is still considered a Schedule I Drug under the Controlled Substances Act (CSA).
But the analysts who worry about this crackdown are ignoring a ton of other data.
For example, here’s what Donald Trump said in an interview last summer, when asked about marijuana legalization: “I’m a states person. I think it should be up to the states, absolutely.” (Source: “Brandon Rittiman’s Trump interview transcript,” 9NEWS, August 3, 2016.)
I think this is pretty significant information if you’re trying to evaluate whether Trump will overrule the states. He literally said he will not. So it doesn’t matter what Sessions believes in private; his boss doesn’t want to crack down on the states’ control over their own destiny.
2. Take Sean Spicer Off the Leash
Another person who seems to be contradicting his boss is Sean Spicer, the embattled White House press secretary. Sometime in late February, Spicer said that states should expect “greater enforcement” from the federal government. However, he restricted his comments to recreational marijuana, saying there was a “big difference” between medicinal and recreational use. (Source: “Spicer: Feds could step up enforcement against marijuana use in states,” The Washington Post, February 23, 2017.)
Seeing as Spicer is supposed to be the voice of the president, analysts freaked out. But I think their fears are overblown. For one thing, the Department of Justice refused to comment on Spicer’s claims.
Why? Because they know that drug enforcement costs money. A lot of money. More money than the debt-laden government can afford for prosecuting victimless crimes.
This was nothing more than a misstep by Spicer. You’ll notice that the topic hasn’t come up much since then. There may be further downside risk if Spicer renews his attacks, but it’s unlikely that he will. There was a lot of political blowback from his comments.
For instance, Washington Attorney General Bob Ferguson responded publicly by saying: “My office will use every tool at our disposal to ensure that the federal government does not undermine Washington’s successful, unified system for regulating recreational and medical marijuana.” (Source: Ibid.)
3. Prevent More States from Legalizing Marijuana
So far, only eight jurisdictions have made the full jump to legal weed: Oregon, Colorado, Washington, California, Nevada, Massachusetts, Maine, and the District of Columbia.
Donald Trump could theoretically pressure other states away from marijuana legalization, but that argument has a lot of shaky assumptions.
First off, it assumes that the president cares a lot about this issue; that he keeps it at the top of his mind, and is willing to spend a lot of time and energy on it.
I doubt that. Candidate-Trump ran on a platform called “Make America Great Again,” in which the country’s greatest problems were open borders, free trade, and corruption—not your neighborhood pot smoker. That issue wasn’t in his top five concerns.
Second, it assumes that states will give in to the White House’s political pressure.
I doubt that as well. Many states are overburdened by debt, short on jobs, and looking to boost tax revenues. The marijuana industry gives them a chance to kill several birds with one stone. Why would they give that up for a federal government that can’t afford to send them more financial aid? I just cannot see it happening.
Maybe I’m wrong; maybe Trump will have a change of heart and become extremely hostile to marijuana stocks in 2017. It’s possible. But no one can say it’s more likely than the alternative.
Will Trump Legalize Marijuana in 2017?
Analysts are so concerned with worst-case scenarios that they underweigh best-case scenarios. This is a bad way to value the risk/reward trade-offs of pot stocks, particularly because they are in an accelerated growth cycle. Returns of 400% or 500% are pretty common in this industry.
As such, we must consider the possibility that Donald Trump legalizes cannabis at the federal level. Not only would this event be amazing for marijuana investors, it would add a tiny tailwind to GDP growth. Maybe this rationale would tempt Trump into the legalization camp.
Is it likely? No. But is it possible? Yes.
I just think that we should look at the full range of possibilities. After all, how can you find the right price without knowing the full potential?
Conclusion on Marjiuana Stocks
Too many investors and analysts are overweighting the “Trump vs Marijuana” story. Any neutral reading of the landscape suggests that nothing will change. The status quo will continue.
Some states will hold ballot initiatives to decide on marijuana legalization. The ones that vote in favor will pass the law, kick start a new industry, and make a ton of money. And most importantly, the federal government will continue to look the other way.
That’s how I see this playing out for marijuana stocks in 2017.
President Trump only has so much political ammo to spare. He’ll likely save it for big issues like the budget or immigration reform, while leaving these smaller issues to be sorted out at the state level. That’s been the doctrine of the Republican Party for as long as I can remember.
It doesn’t make any sense for them to shift gears now. So, if I were a betting man, I’d wager that Trump will keep his hands off marijuana stocks in 2017.