Marijuana Shakes Taboo But It's Still a Bad Investment

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A variety of medicinal marijuana buds in jars are pictured at Los Angeles Patients & Caregivers Group dispensary in West Hollywood, California, October 18. Mario Anzuoni/Reuters

This article originally appeared on the Motley Fool.

You'd struggle to find an industry that's growing as consistently fast as marijuana. While it's not uncommon to find an industry that has double-digit growth potential for a few years, investment bank Cowen & Co.'s estimates suggest the legal cannabis market could expand by nearly 24 percent per year through 2026 to about $50 billion. Those are numbers that are hard for businesses and investors to overlook.

It's what's going on behind the scenes that's truly remarkable. In a relatively short period of two decades marijuana has been transformed from one of the most taboo topics to a substance that's now recognized as medically legal in half of all U.S. states. It's also legal to purchase certain amounts of recreational marijuana in four states—Colorado, Washington, Oregon, and Alaska—along with Washington, D.C., for adults ages 21 and up.

The real impetus for change in the cannabis industry has been the rapidly shifting, and improving, public opinion toward the drug. According to the many polls Gallup has conducted over a nearly five-decade period, it's only since the mid-1990s that the public's opinion of marijuana has shifted. In 1995, just 25 percent of Gallup's respondents wanted to see pot legalized nationally. By 2005, that figure had risen to 36 percent, and by 2011 it touched 50 percent for the first time. With the national pollster releasing its 2016 marijuana poll earlier this month one thing is clear: marijuana is no longer taboo.

According to Gallup, support for legalizing marijuana nationally has now hit 60 percent, an all-time high (no pun intended). Growing public support could put pressure on the legislatures of the remaining states that haven't legalized marijuana—especially those that don't have the initiative and referendum process—to reconsider their position on medical cannabis. As a reminder, support for legalizing only medical cannabis is even higher, with a 2015 CBS News poll putting favorability for such a measure at 84 percent.

A recently released marijuana poll from the Pew Research Center would appear to concur with Gallup's findings. Nearly three weeks ago Pew Research pegged support for legalizing marijuana at 57 percent, an all-time high, with just 37 percent preferring it remain illegal. Comparatively, 60 percent of respondents wanted it to remain illegal just one decade prior.

Even with the U.S. Drug Enforcement Agency rejecting two petitions to reschedule marijuana in August, the industry looks as if it could continue to grow on the heels of strong support from the American public.

One thing for opportunistic investors to keep in mind

Growing support for marijuana might have opportunistic investors thinking that buying into the cannabis industry is a smart move. However, certain aspects of the industry continue to make it anything but investor-friendly.

To begin with, there aren't many investable marijuana stocks. With the exception of GW Pharmaceuticals, which has discovered more than five dozen cannabinoids and is attempting to use those cannabinoids to effect positive biologic changes in the treatment of epilepsy, cancer and type 2 diabetes, to name a few ailments, there aren't any other pot stocks trading on reputable stock exchanges. Although we're witnessing improved reporting standards for over-the-counter stock platforms, those standards still aren't the same as if they were listed on the NYSE or Nasdaq, which makes finding accurate financial information somewhat spotty. Not to mention, nearly all marijuana companies are currently losing money.

The cannabis industry also faces a number of disadvantages that are liable to turn investors off. For example, pot companies are having a very difficult time accessing basic financial services from banks and credit unions. Though many states that have legalized medical and/or recreational marijuana have provided a workaround for banks and credit unions to legally provide a checking account or line of credit to pot businesses, the fact that banks are insured by the federal government could theoretically expose them to prosecution in the future. Remember, cannabis remains illegal at the federal level. This means most banks (about 97 percent) have remained on the sidelines, which is forcing cannabis businesses to deal solely in cash—and cash creates a major security concern.

Additionally, marijuana companies are contending with a major disadvantage come tax time. The Internal Revenue Service disallows businesses that sell illicit substances, such as marijuana, from taking normal business deductions. It essentially means pot businesses are paying tax on their gross profits instead of net profits; or in other words, dramatically overpaying on their taxes compared to "normal businesses." Having to hand back a lot of would-be profit to the federal government isn't exactly ideal from a business perspective.

Thus, while the marijuana industry looks poised for continued expansion at the state level based on improving public support, the fundamental factors that are behind the scenes still indicate that investors would be better off sticking on the sidelines.

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Marijuana Shakes Taboo But It's Still a Bad Investment | U.S.