Californian potheads can rejoice: as of 1 January they have officially become the most recent state in the US to legalise the recreational use of cannabis.
Stoners in San Diego, Santa Cruz, the San Francisco Bay Area and Palm Springs queued up in droves to become the first to legally purchase weed from the close to 90 dispensaries who received state licenses to open on New Year's Day.
California follows in the footsteps of Colorado, Washington, Oregon, Alaska, Maine and Massachusetts which have already legalised marijuana for medicinal and recreational use.
It's no surprise that California has finally enacted this legislation – it is seen as a socially and politically progressive state and was the first in the US to legalise medicinal marijuana way back in 1996. And the news is still generating a significant level of market excitement.
No wonder: California is the most populous state in the US and is the world's sixth-largest economy.
Whatever your thoughts are on the recreational use of the drug, one thing is for certain: pot has the potential to be very big business.
US investment banking and financial advisory firm Cowen & Co estimates that the American market for recreational marijuana will grow to US$50 billion by 2026.
And all signs indicate that Canada will also legalise the recreational use of cannabis very soon: Canadian Prime Minister Justin Trudeau has pledged to do so by July of this year.
Pot stocks listed on the Toronto exchange have been going gangbusters on the back of both the California legislation and the creation of a new US-listed ETF comprised mostly of Canadian cannabis companies.
Stocks like THC BioMed Intl Ltd and CannaRoyalty Corp both saw high double-digit growth overnight Tuesday.
And at home local pot stocks have also risen sharply after the federal government announced it would legalise the export of pot for medical purposes today.
Creso Pharma Ltd (ASX: CPH) is up almost 13% on Thursday to $1.12, MMJ Phytotech Ltd (ASX: MMJ) rose 11% to 52.5 cents and Auscann Group Holdings Ltd (ASX: AC8) was up 35% at $1.15.
However, it's important not to conflate developments overseas with the situation in Australia.
When nations with similar legal systems to ours legalise cannabis for recreational use it can lead to market optimism at home, but recreational cannabis legalisation does not seem to be a key issue for governments here – despite softening attitudes towards medicinal marijuana use, most notably in Victoria.
And even in California the process of legalisation won't be smooth sailing. Some communities like Fresno have forbidden recreational marijuana use and the US federal government still views weed as a proscribed substance, putting it in the same category as heroin. Systems of taxation and regulation will also have to be tested to ensure that legal markets replace black markets and the legislation is viewed as successful.
Foolish takeaway
It is important not to get swept up in the excitement generated overseas when evaluating pot stocks back home. But that doesn't mean there aren't any local companies that could provide significant growth potential for those with a diversified portfolio who are willing to take a punt.
Two ASX-listed stocks in particular currently provide exposure to the Canadian market.
MMJ Phytotech recently invested C$2 million in young Canadian cannabis company Weed Me Inc., and also holds a 59% stake in Vancouver-based Harvest One Cannabis Inc.
And last year Creso Pharma acquired Canadian medicinal cannabis producer Mernova Medicinal Inc., which operates out of Nova Scotia.
Both of these small cap stocks are risky investments, but if you're optimistic about the overseas market for weed they could offer you a useful way in.
