Marijuana Legalization at the Federal Level; How Will this Affect Investing in 2019?

Marijuana Legalization

2019 will likely be the year in which we’ll finally see a US federal vote on legal marijuana, as America officially seats the most pro-cannabis reform Congress in its history. Last week, Democratic Senator Ron Wyden of Oregon introduced Bill S. 420 that would legalize and regulate marijuana federally, one of three bills included in a package known as “The Path to Marijuana Reform.” If passed, the bill could remove cannabis from the Controlled Substances Act, and would be regulated in the same way as alcohol at the federal level, while establishing a federal excise tax on legal sales and creating a system of cannabis business permits.

Granted, the odds of this bill passing are fairly small, but as we’ve seen anything can happen in the current political climate. At the moment, a majority of the members in the House of Representatives support state legalization, but Democratic leaders haven’t made legalization a priority for this session. In addition, Senate Majority Leader Mitch McConnell is still in charge, and has said that he doesn’t “have any plans to endorse the legalization of marijuana.” We are still dealing with divided Congress, and it’s not likely that anything will get done, much less marijuana legalization.

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But in the event that that marijuana legalization does get passed, cannabis stocks would inevitably soar. Yet it’s also possible they could plummet just as fast, as the markets move from initial euphoria to the long, difficult road of full regulation and legalization. However, it’s probable that a more stable and mature cannabis market may also emerge, as a flood of institutional investors start pouring into large-cap marijuana stocks. This has already started in Canada, according to BNN Bloomberg, who recently reported that Alberta Investment Management Corp. and British Columbia Investment Management Corp. had participated in Canopy Growth Corp. (CSE:WEED) (OTC:CGC)’s $200.7-million financing in early 2018.

Another trend we’ll see is an unprecedented round of mergers and acquisitions, as giant consumer brands such as Coke (NYSE:KO), PepsiCo (NASDAQ:PEP), Mondelez (NASDAQ: MDLZ) and Mars finally get off the fence and fully commit to the market. And they’d likely be eyeing quite a few buyout targets. In September, a group of Canadian investment firms invested $57-million in US cannabis grower and retailer MedMen Enterprises Inc. (CSE:MMEN) (OTC:MMNFF), while Aphria Inc. (TSE:APHA) recently rejected a hostile takeover bid from Green Growth Brands (CSE:GGB) (OTC:XTHCF). In a twist, the lifestyle-oriented Green Growth Brands could find itself as a takeover target.

However, the M&A trend will only accelerate under federal marijuana legalization, as we’ve seen it begin already. Over the past six months, major brands have started making huge bets in marijuana, with the understanding that full legalization is inevitable. On December 7, Marlboro-owned Altria Group Inc. (NYSE:MO) announced that it would be buying a 45% stake in Canadian cannabinoid maker Cronos for an eye-watering $1.8-billion. Meanwhile, liquor giant Constellation Brands said it would significantly bump up its ownership of Canopy Growth Corp. in August, with a $3.8-billion investment, while Molson Coors Brewing recently entered a joint venture with Quebec-based The Hydropothecary Corp. to explore the white-hot market for cannabis-infused drinks in Canada. This M&A buzz could last well into the year, regardless of legalization.

However, in the likelier scenario in which marijuana legalization does not pass, the overall effect could still be positive for the cannabis industry. Proposed legislation, even failed ones, often give federal politicians a better understanding of the cannabis industry and effectively normalizing the national political debate around the topic. And it’s unlikely that big business will change their minds about investing in cannabis, which means we’ll still see a coming wave of consolidation, as the recreational and medical industries continue to mature.

>> States due to Legalize Medical Marijuana in 2019

Featured Image: depositphotos/ jeremyn