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1 Billion Reasons Why More States Will Legalize Recreational Pot

Keith Speights, The Motley Fool

There are quite a few reasons why most states in the U.S. still haven't legalized recreational marijuana. Some people have concerns about legalization leading to increased substance abuse. Others are worried about the potential negative health effects that might be associated with using pot. Many fret that teens could be more likely to try marijuana if it's legal for adult use.

Arguments continue to be made for and against these concerns. Meanwhile, the state of Colorado recently made an announcement that almost certainly captured the attention of governors and legislators across the U.S. And this announcement provided 1 billion reasons why more states are likely to legalize recreational pot in the future.

Wooden blocks with the word illegal spelled out on the blocks, cannabis images on the outer blocks, and a hand between the two Ls in the word

Image source: Getty Images.

Rocky Mountain high

Colorado has now made more than $1 billion in revenue from marijuana taxes, licenses, and fees. That's the highest amount made by any state so far from legalizing marijuana. Total marijuana sales since Colorado's legal recreational pot market opened for business in 2014 have topped $6.56 billion.

Marijuana sales in Colorado continue to grow, albeit at a slower pace than in previous years. In 2018, Colorado reported marijuana sales of nearly $1.55 billion versus $1.51 billion in 2017. During the first four months of this year, marijuana sales in the state totaled more than $522 million. That's close to $1.57 billion on an annualized basis.

What has Colorado done with the money it's made from legalizing pot? Schools have received a big chunk of the money. Ninety percent of the state's excise tax on retail marijuana goes to a fund that helps with the construction of public schools. The remainder of the revenue made from excise taxes is funneled to a permanent fund used to assist public schools.

Colorado also imposes a 15% sales tax on sales of marijuana. The state keeps 90% of the revenue from this tax, while 10% is retained locally for use by cities and counties. Colorado puts nearly 12.6% of its share of this money into a public school fund. The rest of the money goes to a fund used to cover regulatory efforts and pay for public health initiatives including behavioral health treatment and prevention of youth marijuana use.

There are other positive economic impacts of legalizing recreational pot as well. Colorado Gov. Jared Polis said that the legal cannabis industry is "helping grow our economy by creating jobs." Currently, there are 2,917 licensed marijuana businesses in the state with 41,076 individuals licensed to work in the legal cannabis industry.

Jumping on the bandwagon

It's not surprising that more states have already jumped on the bandwagon by legalizing recreational pot. Eleven states plus the District of Columbia have legalized recreational marijuana, with Illinois being the latest state to join the ranks.

California is the biggest state so far to legalize recreational pot. It expected to make in the ballpark of $1 billion last year from taxes and fees from its legal marijuana market. However, the actual total came in much lower -- $345.2 million. This shortfall stemmed in large part from tax rates that were too high and burdensome regulations. 

Massachusetts has also run into speed bumps in the early months of its legal recreational pot market. The state anticipated receiving $63 million in tax revenue by midyear but had made less than $6 million by March. As in California, the regulatory framework for approving cannabis businesses in Massachusetts is proving to be an impediment to growth. 

But it's still very early for many of these states that have legalized recreational marijuana. It's likely that other states will learn from California's and Massachusetts' mistakes -- and Colorado's successes. Also, keep in mind that it took a few years for marijuana sales in Colorado to really kick into high gear.

I think that the legalization of recreational pot by states could follow the pattern of state lotteries but at an even faster pace of adoption. Prior to 1964, no U.S. state had a lottery. Today, nearly every state has one. The lure of increased tax revenue to fund state programs is simply too hard to resist. And Colorado has shown how to make a lot of tax revenue from legalizing marijuana. 

Profiting from the trend

How can you profit from the trend of recreational pot legalization? One way is to invest in the stocks of companies that engage directly in the industry by growing and selling marijuana. Another is to invest in the stocks of companies that supply products and services to the cannabis industry.

In my view, Cresco Labs (NASDAQOTH: CRLBF) looks like one of the most promising candidates among pure-play U.S. marijuana stocks. The company is on track to become a pot powerhouse with its pending acquisition of Origin House (NASDAQOTH: ORHOF). When the deal is finalized, Cresco will operate in 11 states plus Canada, run 21 retail cannabis stores with 51 total retail licenses, and market 56 cannabis brands. Thanks to its buyout of Origin House, Cresco will also be the leading distributor of recreational marijuana products in California.

There are a couple of ancillary provider stocks that I think should be good picks. KushCo Holdings (NASDAQOTH: KSHB) is the top supplier of packaging solutions to cannabis growers. The company also provides hydrocarbons and solvents that are used in extracting cannabinoids such as CBD from cannabis. KushCo stock is down so far this year but I think it will rebound as the U.S. cannabis market expands. 

I also like Scotts Miracle-Gro (NYSE: SMG). The company is best known for its consumer lawn and garden products. Over the past few years, though, Scotts has also become a top supplier of hydroponics solutions to the cannabis industry. It's one of the most profitable pot stocks on the planet right now and should generate even greater profits as more states legalize recreational pot.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends KushCo Holdings and Origin House. The Motley Fool has a disclosure policy.