From time to time, clients and friends have asked me about investing in “marijuana stocks.” They typically have heard of a company from a friend at work and want me to do some research on it as a potential investment. The stocks are often penny stocks with little financial data. I have always felt that it was, in general, too early to invest in the cannabis industry. That is, until now.
My change of heart has been inspired by numerous realizations over the past year. The journey started when a friend, who is a Certified Financial Planner, called me to help a friend put together a portfolio of “marijuana stocks.” The account was sizable, and I wanted to dig in to get an industry overview and see if there were some legitimate investment opportunities. What I’ve found has been astounding and completely changed my mind. The marijuana stereotypes are pervasive and certainly carry a negative connotation. From Bob Marley to the hippies, the counter-culture often associated with marijuana use has historically been anti-establishment and often clashed with mainstream society. But this has changed.
Typical consumers of cannabis these days range from professionals to seniors and cover all ages and demographics. Cancer patients are using medical marijuana for nausea control, appetite stimulation and pain relief. Veterans are using marijuana to battle PTSD and anxiety. Seniors are using CBD (one of the active compounds in cannabis and hemp) creams to mitigate arthritis pain. It is not just about “getting high” anymore. In fact, it is the discovery and realization that marijuana can treat a number of diseases and potentially be an alternative to opioids that is changing the game.
From my current research, I now think it is no longer IF cannabis will be legalized in the U.S., it’s WHEN will it be legal nationally. Public opinion has shifted dramatically over the last 30 years, and now the majority of Americans think the use of marijuana should be made legal. The shifting tide could be originating from several areas (demographics or medical treatment research), and the opportunity for tax revenue given Colorado’s success is undeniably attractive for the government. For these reasons and many others, I feel like the stage is set for cannabis to be legal nationwide on the medical and recreational level in less than 10 years.
As of this writing, 33 states in the U.S. already have some form of legal marijuana use while 10 states have approved recreational usage. Early adopters have been states on the West coast and the Northeast. It is likely the trend will move East and then South, given the generally more conservative views of the Southern states. Internationally, Canada has recently legalized cannabis both on the medical and recreational level nationally. This is the first large developed country in the world to do so and sets a precedent for others to follow. Back in the U.S., marijuana usage is still federally illegal even though many states have legalized usage in some capacity. The disparity is creating massive conflicts between federal, state, and local governments making it difficult for companies and consumers.
Further, while the recent departure of former Attorney General Jeff Sessions (an open opponent of the pro-legalization movement) was celebrated by the cannabis community, uncertainty remains regarding his replacement. Still, more and more states are looking into legalizing cannabis given the number of marijuana-related bills being currently proposed in Congress. My long-term opinion is that as state adoption increases, regulation should move toward the “alcohol model” with appropriate age restrictions, labeling requirements, and health warnings for consumption.
The tide has turned, and there has been enough growth in the legal cannabis industry to create legitimate investment opportunities for the future. I see similarities to the tech sector as it evolved through the late 1980s and 1990s. In that time, there were countless mergers, acquisitions, failures, successes, etc. as the industry grew and evolved; and the cannabis industry will likely follow a similar path over the next 20 years. The question then becomes, “Where are the opportunities and what are the investment considerations?”
In my research, I am categorizing cannabis-related companies in three main areas: Direct Cannabis Exposure, Biotech, and Passive Investments. Direct Cannabis Exposure is then broken down between growers, suppliers, and retail distribution. For Biotech, specialty strains are being isolated to treat specific illnesses while commodity cannabis can be used for pain management and anxiety control. Passive investments would include companies where cannabis products would only encapsulate a portion of their overall business.
Let’s dive a little deeper into “growers.” For companies growing cannabis as their main source of revenue, here are a few questions to consider :
What are the company’s profit margins?
Are they complying with applicable laws regarding state and local regulation?
What is their potential market size?
What is the competitive landscape, and could industry supply outstrip demand and put them at risk?
For each segment above and the associated company, there is a myriad of questions and due diligence to find an attractive investment opportunity. Further, with an emerging industry, the answers to the questions often change suddenly. This has been a real issue within the cannabis industry as regulations vary from state to state and the political environment is constantly shifting. One of the biggest issues with the cannabis industry right now is the lack of company financial data. Many companies in the legal cannabis industry are so new that they have limited data to analyze. Sales may only go back a year or two. Another issue is that even though the company may be publicly traded; reporting requirements vary for exchanges, and some do not require the disclosure of financial statements at all. So, the company may have a great website, but are they selling anything? It reminds me of the late 1990s when people would throw money at any company with a “.com” in the name. Many times, that strategy did not end well. I feel investors have to be very careful in choosing among cannabis-related companies to make sure the business model is solid, and the company has a good plan for growth.
Another challenge in the cannabis industry is extreme volatility. Changing regulations, mergers, and industry news can send these stocks up or down dramatically in a short period of time. Therefore, it is very important to consider how much of the total portfolio one should prudently invest in this sector given their overall financial plan and risk tolerance.
These are only a few considerations when evaluating investments in the cannabis industry. If you are interested in investing, I recommend talking with a qualified investment advisor about opportunities that may compliment your other investments and the suitability of cannabis investments given your overall financial situation.
AdaptFirst Investments LLC (AFI) is providing this information for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Commentary of any kind in this article is based on AFI’s opinion and analysis, and not representative of future performance of any security or market. AFI AND CONTENT SOURCES MAKE NO REPRESENTATIONS AND DISCLAIM ALL WARRANTIES OF ANY KIND IN CONNECTION WITH THE SUBJECT MATTER OR ABOUT THE ACCURACY, COMPLETENESS AND SUITABILITY OF THE INFORMATION FOR ANY PURPOSE. Use of the article information is at reader’s own risk. Personalized investment advice can only be rendered after engagement of AFI for services, execution of the required documentation, and receipt of required disclosures. Please contact AFI for further information. Information presented is not intended as tax or legal advice. Readers should consult legal or tax professionals for specific information regarding their individual situation.
Charles Freeman is a Chartered Financial Analyst and President of AdaptFirst Investments in Greensboro, NC. With over 20 years in the investment industry, Charles helps clients find and invest proactively in potential future trends and attractive investment opportunities. Charles has been published or featured in Investor’s Business Daily, The Saturday Evening Post, WXII 12 News, HQ Greensboro, and more.