Could Marijuana Be The Big Winner In Tuesday’s Vote?

Next Tuesday – election day – voters in five state will say yes or no to legalizing marijuana, either for medical or recreational purposes, or both. Those votes could go a long way toward reshaping the federal approach to weed.

Which means, those votes could go a long way toward propelling share prices for a broad collection of marijuana-related companies.

The states in play are New Jersey, Arizona, Mississippi, South Dakota, and Montana. Local polling indicates that a “yes” vote will likely carry the day in the first four states. Montana is tighter, and will likely come down to undecided voters.

At the moment, 34 states have legalized marijuana in some fashion. Another four or five would indicate that more than 75% of the states now view weed as little different than alcohol and tobacco – a vice to be regulated and off which state governments can extract millions of dollars in annual taxes.

That’s the point at which change is likely to happen at the federal level, and that will have investment implications.

Washington, DC, is very rarely at the forefront of social progress. It takes its cues from what’s happening in the states. Thus, when more than three-quarters of states have decriminalized marijuana (post Nov. 3) DC will be hard-pressed to maintain federal rules that hamstring the industry’s capacity to operate in terms of banking and intrastate commerce.

The country will quite likely see a fairly quick move in Washington to accept what is already a fait accompli. Decriminalization of marijuana will be the first step, regardless of who occupies the Oval Office next year. That will open up the industry to banking, from which it is currently shut out. The Feds might take longer to actually legalizing pot nationally, but ultimately they’ll do so because of the tax haul Treasury will collect (and with $27 trillion national debt and a multi-trillion budget deficit, tax dollars are going to be increasingly relevant to Uncle Sam’s fiscal health).

In the aftermath of Tuesday’s vote, a bumper crop of media reports will chronicle and comment on the changing environment for the marijuana industry and, thus, marijuana stocks. Certain names are sure to gather up a lot of ink: Chronos Group (CRON), Canopy Growth (CGC), Aurora Cannabis (ACB), and Tilray (TLRY), among others.

Innovative Industrial Properties (IIPR), a marijuana REIT, will likely see it’s named mentioned a lot as well, and it’s a fine company for the time being, though once the Feds open the industry to banking, the flood of cash into marijuana lending and property development will likely cause some headaches for Innovative Industrial.

Instead, look for the consumer side of the industry. That’s where the bigger opportunities are likely to emerge. The challenges that Innovative Industrial will face when banks and other financial players jump into the industry mimic what growers will face Big Tobacco and independent tobacco farmers joins the marijuana-growing frenzy.

Companies such as KushCo Holdings (KSHB), a maker of specialty marijuana-product packaging that must be approved by states, likely have a bright future despite recent struggles. Same with some of the retailers, such as Arizona-based Harvest Health and Recreation (HRVSF), which was overly enthusiastic about its expansion early on, but which has a big opportunity if Arizona’s recreational cannabis law passes. Harvest operates dispensaries in seven states, but nearly half of its 38 stores are in Arizona.

Of course, picking individual stocks in an industry as new and uncertain as legal marijuana can be a lot like playing roulette and hoping you’ve picked the right number. So, perhaps the easiest play on the industry right now is simply to cover as much of the board as possible through an exchange-traded fund, such as Advisorshares Pure Cannabis ETF (YOLO), which has rebounded sharply since the Covid-induced lows but is pretty much flat for the year.

Where other ETFs tend to focus on the growers or Fortune 500 companies with weed exposure, YOLO’s primary interest lies in the consumer side of the industry, including cannabis bio-pharma (such as GW Pharmaceuticals) and weed-product manufacturers (such as Cureleaf Holdings).

There’s no guarantee which brand will emerge as the Coca-Cola or Gillette of marijuana, so having broad exposure to numerous companies with the potential to be tomorrow’s marijuana heavyweights seems the safest approach in an otherwise risky industry.

And if the votes go as expected in those five states, then Yolo – and weed stocks in general – could be one of the big winners in Tuesday’s vote.