A Democratic wave could make things much easier for the marijuana industry, Jim Cramer says

The U.S. marijuana industry will take a turn for the better if Democrats find a way to sweep the November election, but investors should be selective about their stock picks, CNBC’s Jim Cramer said Tuesday.

While Democratic presidential nominee Joe Biden is not in favor of legalizing cannabis, investors can expect the regulatory environment to be loosened for weed operations if he wins the White House and his party gains control of the Senate, the “Mad Money” host said. Biden calls for decriminalizing marijuana use and expunging all prior cannabis use convictions as part of his criminal justice plan.

“If you want to bet on a blue wave in two weeks, a Democratic wave could make things much easier for the marijuana industry,” he said.

As for the stocks to play in the space, Cramer recommends investors pass on most of the Canadian cannabis producers because he expects there would be a boom in domestic production. He did, however, recommend Ontario-based Canopy Growth, which is backed by alcohol giant Constellation Brands and has an interest in the U.S. grower Acreage Holdings.

“Just remember, stick to the picks and shovels plays or the vertically integrated operators that are actually profitable,” Cramer said.

A picks and shovels investment strategy is where investors buy stock in companies that supply tools and services that businesses use to produce products. The strategy is a play on suppliers.

Cramer recommended GrowGeneration, which sells hydroponic equipment, and real estate investment trust Innovative Industrial Properties, which leases to medical marijuana facilities.

“Basically it’s Lowe’s or Home Depot for anyone who’s looking to grow something indoors,” Cramer said of GrowGeneration. “If you think we’ll see a boom in cannabis production, don’t bet on a grower, bet on the grower’s landlord,” he said of Innovative Industrial Properties.

Wall Street has upped its bets on the odds of a sweep since a controversial presidential debate between Biden and President Donald Trump, analysts have found. The former vice president has a 65% chance of winning the White House and there’s a 55% chance his party could take a majority in the Senate, according to research from Raymond Jones, to give Democrats control of the entire Congress for the first time since losing the chamber in the 2010 midterm election.

Given that Biden is in favor of decriminalizing marijuana, Cramer is hopeful that lawmakers could push through legislation that would allow banks to do business with marijuana dispensaries in the 11 states and Washington, D.C., where it is legal. Voters in Arizona, South Dakota, New Jersey and Montana will be asked whether marijuana should be legalized for recreational use in the Nov. 3 election.

The Democratic-controlled House of Representatives a year ago passed a bill to do just that for the banks, with sizeable support from Republicans in the chamber, but it later died in the Senate.

Some Republicans have balked at allowing banks, which are regulated federally, to service businesses in the industry if the drug remains illegal at the federal level. Democrats have also called for further action addressing criminal justice and legalization.

“I think there’s a very good chance that unified Democratic control over Congress could make life much easier for the domestic cannabis industry,” Cramer said. “A lot of investors seem to be wagering on that outcome, which is why this whole group’s been blazing higher.”