Will the U.S. legalize marijuana? Although 33 states have legalized medical cannabis and 10 have also legalized recreational pot, marijuana remains illegal at the federal level. But legislation is moving through the U.S. Congress that would change federal laws to recognize individual states' authority to enforce their own marijuana laws.
You can pretty much count on the marijuana legalization bill passing in the House of Representatives. Sen. Cory Gardner (R-Colo.), a sponsor of the bill, thinks that the votes needed to pass the legislation in the Senate are there. He also has stated that President Trump supports the effort.
But don't put the cart before the horse. There's a four-letter word that could stand in the way of U.S. marijuana legalization. And that word is spelled h-e-m-p.
Wooden cubes lined up spelling out "Illegal" with cubes showing marijuana leaves at both ends and a hand in between the two blocks with the letter "l."
Image source: Getty Images.
The hemp hurdle
Hemp, like marijuana, comes from the cannabis plant. A key difference is that hemp contains very low levels of THC -- the primary psychoactive ingredient in cannabis -- while marijuana contains a significant amount of THC. Because of this difference, a person can get high from using marijuana but not from consuming hemp.
This major chemical difference helped clear the way for U.S. legalization of hemp in December 2018. The 2018 farm bill that included language making hemp legal in the U.S. received overwhelming bipartisan support in both the House of Representatives and the Senate.
One of the biggest cheerleaders for the farm bill was Sen. Mitch McConnell (R-Ky.). The senator used his position as Senate majority leader to help ensure that hemp legalization was included in the farm bill and was instrumental in pushing the bill across the finish line.
McConnell's home state of Kentucky has become a hotbed for hemp production. The senator stated in an interview last year that hemp "could be big" for his state. McConnell added, "I don't know how big this can become, but I know we're ahead of everybody else. We're not afraid of the competition."
Probably the greatest opportunity for the hemp industry is in extracting cannabidiol (CBD) for use in a variety of products. Cannabis market research company Brightfield Group even projects that the U.S. hemp CBD market could reach $22 billion by 2022. That estimate could prove to be overly optimistic, but there should nonetheless be a substantial market for CBD products.
An offshoot of this opportunity, though, is that McConnell's enthusiasm for hemp could present a big hurdle for marijuana legalization in the U.S. CBD can also be extracted from cannabis plants used for marijuana. If federal laws change to recognize individual states' rights to make their own decisions on legalization of marijuana, the competitive advantage that McConnell sees for Kentucky's hemp industry could be jeopardized.
As the majority leader, McConnell decides which bills make it to the Senate floor for a vote and which don't. The fate of U.S. marijuana legalization rests in his hands. And he has a vested interest in protecting Kentucky's hemp industry from potential competition.
Political calculations
This doesn't mean that efforts to change federal marijuana laws are necessarily dead in the water, though. There's still a possibility that the current marijuana legalization bill making its way through Congress could pass as early as this year.
While Mitch McConnell wants to protect the hemp industry in his home state, he also would like to remain the Senate majority leader. To keep his position, the GOP must retain control of the Senate. That's going to be a tough challenge with 22 Republican seats up for election in 2020 compared with only 12 Democratic seats.
McConnell knows that every seat will count. One of the GOP seats that could flip to the Democrats currently is held by Cory Gardner. Securing federal legalization of pot could be a key factor in whether or not the Republicans hold on to Gardner's Senate seat because it would eliminate the possibility of U.S. government intervention in Colorado's large marijuana industry. And it could ultimately decide whether or not Mitch McConnell is still the Senate majority leader in 2021.
However, McConnell's political calculations could lead him to roll the dice and block any attempt to vote on marijuana legalization in the Senate. If that happens, the fate of U.S. marijuana legalization is likely to hinge on the outcome of the 2020 elections.
Investing in the meantime
What does all of this mean for investors seeking to profit from U.S. cannabis markets? You can expect that the valuations of U.S.-based cannabis stocks will continue to be well below those of Canadian cannabis stocks as long as marijuana remains illegal at the federal level in the U.S. This presents a buying opportunity for investors who feel confident in the eventual U.S. legalization of marijuana.
One stock that would almost certainly be a winner from changes to U.S. federal marijuana laws is KushCo Holdings(NASDAQOTH: KSHB). The company supplies packaging solutions to the U.S. cannabis industry, as well as hydrocarbons and solvents used in extracting cannabinoids from cannabis plants.
However, some Canadian stocks could also benefit tremendously from U.S. marijuana legalization, notably Canopy Growth(NYSE: CGC). The company recently announced that it was buying the right to acquire U.S.-based cannabis operator Acreage Holdings. This deal would only be finalized, though, if federal marijuana laws in the U.S. are changed.
I like KushCo and Canopy Growth as good picks to bet on U.S. marijuana legalization. However, I also think they should perform well even if federal laws don't change anytime in the near future. One key factor in my view is that both companies are also poised to profit from the U.S. hemp market.
KushCo's packaging can be used with hemp products as well as marijuana products. Its hydrocarbons and solvents can be used to extract CBD from hemp. Canopy Growth is investing more than $100 million in building a hemp industrial park in New York state and could expand into other states in the near future.
It could be months or even years before U.S. marijuana laws are revised. The good news for investors is that there are ways to win while they do something, which, like hemp, is a four-letter word: wait.
