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Marijuana Legalization And A Republican Government: What Does It Mean For The Pot Industry?

Americans in nine states voted on marijuana laws this week.

California, Massachusetts, Nevada and Maine decided to legalize the recreational use of marijuana; North Dakota, Arkansas, Florida and Montana passed medical marijuana laws — or amendments, in the latter case. The only one of the nine states with marijuana on the ballot that voted against legislation was Arizona.

On the federal level, Donald Trump and the Republican party won the election. This means that, soon, the country will be run by a Republican president, a Republican House and a Republican Senate.

Will they continue to let states decide on marijuana laws, or will they go back on the 2013 Cole Memo, which stipulates noninterference (from federal agencies) with these state marijuana laws?

Words On Weed From The 420 Investor

To get a clearer picture of what’s coming, Benzinga contacted industry expert Alan Brochstein, founding partner at New Cannabis Ventures and founder at 420 Investor.

“My immediate concern when I saw what was going on Tuesday night was that the Cole Memo could be at risk,” Brochstein commenced.

“The fact that just one party, especially that party, controls both the Congress and the White House raises some concern, because Donald Trump is no friend of cannabis. He’s tolerant, it seems, but certainly not a friend,” the expert noted. “I don’t think he’ll necessarily go after cannabis on his own, but Chris Christie is on his transition team, and he is an enemy of legal cannabis.”

The Problem With The Cole Memo

Brochstein went on to look into the Cole Memo’s future. “The Cole Memo could be ripped up, and that is a huge problem because, over the last three years and three months since that’s been in effect, you’ve had a lot of progress in the cannabis industry and a lot of — real— investors coming in, putting lots of money into the industry, and you’ve had very talented people joining. Up until now, all that you risked was your reputation and your money. However, if they rip up the Cole Memo, you’d risk incarceration and asset forfeiture. So, just the fear of the Cole Memo getting ripped up could stifle the industry a little bit.”

“I don’t think they are going to rip up the Cole Memo, though; I think the genie is already out of the proverbial bottle,” he continued. Nonetheless, he expressed disappointment with the Republicans controlling the Congress.

“There’s been some very important cannabis reform legislation that has been stuck in the Senate Judiciary Committee, headed by Chuck Grassley, and it seemed like it was time to remove him now. Unfortunately, that didn’t happen. So, we are going to have at least two more years where we are not going to get cannabis reform,” neither for veterans, nor for banking institutions, nor for research, nor for taxes — income taxes in the industry can sometimes surpass 100 percent, as per the 280E tax rule.

All of the issues mentioned above constitute risk factors, Brochstein explained. “I’m not predicting that the Cole Memo will be ripped up, but it’s a huge uncertainty,” which can result, in the best case, in a disaster, and, in the best case, in a slowing-down in the amount of smart and wealthy people willing to fund the industry.

The Smart Play

Benzinga moved on to ask the expert about plays in the marijuana industry against such an uncertain backdrop.

Most cannabis stocks are “a joke,” Brochstein assured. “So, there’s no way to play anything, except to get out of them. A lot of these stocks that ran up, especially those with cannabis or marijuana in their name [...] are going to go down because they have no business being up; it was just a speculative trade.”

Looking at the “real market,” the investor breaks it down into two components:

1) Canadian Licensed Producers, of which he has been a big advocate for quite some time, as they offer all the advantages of federal legality. “I’m not saying you should go buy all these stocks blindly, but those are the ones to consider.”

Right now, there are nine publicly traded stocks, and Brochstein follows six of them closely — although he does not like them all. In fact, he added, there’s only one he likes. Sign Up for 420 Investor on Marketfy to find out which one it is.

2) Biotech: “A lot of people like to talk a lot about these biotech stocks, but, in my opinion, there’s only one: GW Pharmaceuticals PLC- ADR GWPH 0.81%. Most of the other stocks people talk about have nothing to do with marijuana; they are just regular biotechs that are synthesizing drugs that happen to be components of marijuana [...] And I don’t really like any of these companies.”

However, Brochstein disclosed that, since the election, he has also trimmed his exposure to GW Pharmaceuticals, because “biotechs are doing better.” Having said this, he added that, for people looking to invest in the cannabis theme, GW Pharma could be a nice choice, especially taking into account that it’s relatively immune from the risks mentioned above due to its leading position in FDA-approved cannabis-based drugs.

Looking for some derivative plays on marijuana legalization? Check out our article on Why Marijuana Legalization In California Could Boost Real Estate Big Time, where you’ll find investment options like DCT Industrial Trust Inc DCT 0.8% and First Industrial Realty Trust, Inc. FR 0.24%.

© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.


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