About half of Americans have tried it. (Or rather, half have admitted to trying it.) And a majority want to legalize it. These are exciting times for the legal marijuana business.

You might not fall into any of these groups. But it’s clear that the marijuana policy reform movement has picked up steam in recent years. Since 1996, dozens of states have decriminalized the plant or allowed medical use.

[ad#Google Adsense 336×280-IA]Four states (plus D.C.) have legalized it entirely.

And another four did so in the recent election.

The marijuana business could see impressive growth.

There’s huge recreational demand.

But there are also many medical and industrial applications for the plant.

Our Chief Income Strategist Marc Lichtenfeld has recommended one high-flying stock that’s developing a marijuana-based epilepsy treatment to Lightning Trend Trader subscribers.

But the news isn’t all rosy for this fledgling industry…

“Legalized” states are in conflict with the federal government. It still classifies the plant as a Schedule 1 drug. President-elect Trump has maintained an ambiguous but hesitant position on legalization. So it’s unlikely that the White House will resolve this conflict.

What’s more, most of the “pure-play” marijuana stocks available now are risky microcaps. There are many compelling reasons to go long or short on the rising marijuana business. Let’s look at a few of them.

The Case Against Investing in the Marijuana Business
Donald Trump has never clearly stated his position on pot (and for that matter, Clinton didn’t either). But his comments on the issue aren’t very favorable. At rallies, he has criticized Colorado’s legal marijuana system. And he has mused that marijuana hurts “people’s health and brain powers.”

In short, it’s very unlikely that the president-elect will do away with federal prohibition. And as long as that exists, there will be a ceiling on the growth of the marijuana industry.

The current landscape of marijuana stocks is also very risky. It’s dominated by small caps like American Cannabis (OTC: AMMJ) and Cannabis Sativa (OTC: CBDS). Both have seen huge gains before and after the successful ballot initiatives. But they’re still highly volatile penny stocks.

If you’re a risk junkie, you could potentially make a lot of money on these companies. But they aren’t reliable investments.

The Case for Investing in the Marijuana Business
Fortunately, there’s a flip side to Trump’s weak stance on marijuana. He hasn’t advocated for federal reform. But he has asserted that states have the right to make their own marijuana laws.

Thus, in the next four years, marijuana businesses will probably still be allowed to operate. They’ll just have to stay in the patchwork of “legal states.” They’d prefer to have Washington’s blessing. But they won’t have to worry about getting raided by federal agents.

As we said before, pure-play marijuana stocks tend to be very jumpy and low volume. But there’s a reason we keep specifying “pure play.” There are other, safer ways to invest in the marijuana business.

The last few years have seen a green-and-gold rush among pharmaceutical companies like Valeant Pharmaceuticals (NYSE: VRX) and GW Pharmaceuticals (Nasdaq: GWPH). They have been creating drugs that use marijuana derivatives. These are being used to treat many conditions. They’ve shown encouraging results on chemotherapy and epilepsy patients.

And there’s another industry that provides an indirect investment in the marijuana business. Marijuana is a plant – and a needy one at that. It requires a lot of resources to grow. And that ties marijuana demand to the performance of gardening supply companies. One of the most successful is Scotts Miracle-Gro (NYSE: SMG).

The company has done well for itself in the past two years. And rising demand from marijuana growers hasn’t hurt.

A stable majority of Americans want to legalize marijuana. But that doesn’t mean that large-scale reform and commercialization is right around the corner. The outlook for marijuana businesses remains hazy. Government pressure and unstable markets threaten the growth of their industry.

Marijuana businesses are poised for growth sometime in the future. But it might take a long time before our laws and markets allow that. By going long on hedged marijuana stocks and showing caution with risky small caps, you can be prepared for any outcome.

— Samuel Taube

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Source: Investment U