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Investing in Cannabis

Investing In Cannabis: Industries

As the cannabis industry expands, so will the types of industries involved. A more mature industry will bring with it a greater variety of companies wanting to get a slice of the ever-growing pie. However, for the moment, there are two primary industries that make up the vast majority of cannabis companies – medical marijuana and growers/suppliers.

We’ve discussed quite a bit about the medical marijuana field, as it’s the easiest to invest in right now and more widely adopted across the U.S. and Canada. There are a handful of companies listed on major exchanges in the cannabis biotech space. There are also plenty of biotech companies working on cannabis drugs on the OTC markets. Other medical marijuana companies are focused on supplements or nutraceutical–type products. These too are predominantly listed on OTC exchanges.

On the other hand, marijuana growers (suppliers) are entirely listed on OTC exchanges. That’s mostly because of the legality/regulatory issues behind growing a (currently) federally illegal drug. There’s also a lack of institutional investors in this space for the same reasons. (On the other hand, cannabis biotech firms are seeing some backing by institutional investors.)

Besides the two major subsets of cannabis businesses, there are a few smaller industries springing up into the publicly traded arena. E-cigs is one area where there has been some growth. Somewhat related, marijuana smoking paraphernalia is another business which could see substantial growth as legality of the drug for medicinal purposes becomes more widely accepted, although it is notable that at the moment many states do not allow the smoking of medical marijuana.

Of course, legality is the gorilla in the room for almost every one of these companies. There is going to be inherent risk in investing in cannabis – in just about any form – until the drug is legalized on a national level, at least for medical use, which is the most likely should it happen. Growers stand the gain the most, but also include the most risk due to the nature of the business. If (when) cannabis becomes federally legal, will it be treated the same as other agricultural products? Will it be subject to a different set of taxes? There’s still much we don’t know.

That being said, there is upside on the state level and a ton of upside in many of these small companies if they survive long enough to see federal legalization completely realized. The infrastructure needed for legalized marijuana is similar to what’s currently in place for alcohol. Producing the product, distribution, sales, marketing… all of it has massive growth potential if you make even the most basic comparisons to the alcohol industry. Marketing is still currently a matter of debate, again, because of federal prohibition.

Although half the country now has legalized medical marijuana, headquarters for upstarts in the space are relatively centralized.  In fact, several small OTC cannabis companies are based in Colorado, explained by that fact that it is one of only four states (along with the District of Columbia) that allow both medical and recreational marijuana. Vancouver, British Columbia is another area hosting many small cannabis companies due to the cannabis-friendly laws in the city. More and more of these upstart companies will appear as medical marijuana usage continues to spread into new states and regions, so keep your eyes out for first movers in different locations where competition can be minimized.

For the time being, it may make certain sense to invest in companies with products that can be used for more than just cannabis. For example, AeroGrow International (OTCBB: AERO) produces Miracle-Gro AeroGardens, a soil-free indoor garden line. AeroGardens can be used for any type of indoor gardening, so it can be sold at major retailers. The fact that it can be used for growing cannabis isn’t even mentioned on the company’s investor website. However, the Colorado-based company is definitely thriving off the cannabis industry.

We’ll get into more of the specifics involved in the various cannabis industries in future articles.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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