So far, conventional thinking on Wall Street has been largely to avoid cannabis-related companies. Amongst other reasons, this is because cannabis remains illegal as a Schedule I drug at the federal level, which has created all types of banking issues and stoked fears about the feds stepping in and shutting companies down. Since Colorado legalized recreational marijuana in 2012, federal prosecutors have shown their willingness to remain hands off and let states regulate the industry independently, but things always could change.
Be that as it may, there is no denying that the legal cannabis revolution is sweeping across the nation and creating a secular opportunity, giving small retail investors a rare opportunity to get in on the ground floor ahead of big money. Make no mistake about it, they will be coming to get a piece of a legal U.S. cannabis industry that ArcView Group estimates could reach $22 billion in annual sales by 2020. Depending on how quickly other states create the framework, that number could be on the low side, considering Colorado reported total marijuana revenue of $1.1 billion through October this year.
Along with Colorado, recreational marijuana is legal in Washington, Oregon and Alaska. In November, voters in California, Nevada, Massachusetts and Maine approved legalizing recreational marijuana as well, bringing the number of states where retail pot is legal to eight. Further, 28 states have now made cannabis legal for medicinal purposes, equating to more than half of Americans living under laws where marijuana is legal in one fashion or another.
While the nation’s support for marijuana is a good harbinger for growth, this is still a nascent industry trying to find its way and investors must be cautious in making investment decisions, including spending time with professional money managers. The vast majority of companies in the cannabis business don’t trade on a national exchange, like the Nasdaq or New York Stock Exchange. They trade over the counter and many don’t regularly report to the Securities and Exchange Commission, making them riskier propositions and putting the onus on the investor to dig deep and perform thorough due diligence.
For those that prefer sticking to blue chips, there are still ways to get exposure to the cannabis space. For example, GW Pharmaceuticals, a Nasdaq-listed company with a $3 billion market capitalization, is entrenched in developing drugs based upon cannabis for hard to treat diseases, like epilepsy. With several clinical trials in the late stage, GWPH is perhaps the best known of all cannabis companies. Insys Therapeutics is another biotech that makes drugs from cannabis components. Microsoft in June made its first foray into the space, partnering with KIND Financial to provide seed-to-sale software to governments for tracking and managing marijuana sales and distribution. Similarly, the New York Department of Health announced using Oracle software for monitoring their medical marijuana program. Lawn and garden giant Scotts Miracle Grow has its hands in the cannabis market through its hydroponic division, which some analysts believe is a key value driver for the company going forward.
Companies like GW Pharma and Insys Therapeutics obviously fall into healthcare’s drug manufacturer industry. It’s important to understand that there are two primary parts to marijuana, THC (tetrahydrocannabinol) and CBD (cannabinoids). THC is the psychotropic part of pot; the stuff that gets you “high.” CBD, for which there are over 110 active types identified in cannabis, is the part that doesn’t produce the psychoactivity like THC and is documented, albeit often anecdotal, to have many medicinal benefits. There is a library of stories out there on the benefits of cannabis for pain management, neurological conditions, headaches, cancer, depression and many other indications. Drug makers like GW Pharma, Insys and smaller peers are focused on clinical research of CBD-based therapies for areas of unmet medical need.
In fact, most product-making companies deal with the CBD constituent of marijuana. Many small companies have either brought, or are attempting to bring, CBD-infused products to market. A Google search will quickly demonstrate the plethora of companies looking to create a brand for themselves in this area. Part of reason for the growing number of companies is due to the expansiveness of the core ingredient, as cannabis is a very versatile plant for use in solids, powders and beverages. A six-time winner of the Cannabis Cup, privately held Bhang, Inc. is perhaps one of the best known cannabinoid-product makers, producing chocolates, gum and oils, as well as vape systems.
Investors can get a piece of a company like Bhang only through public companies partnering or making an investment. Such happened to be the case in early 2014 when OTC-listed Mentor Capital and Bhang struck a deal in which Mentor would make buy a majority stake in Bhang, although the deal eventually soured. Other small companies, such as NYC-based and Canadian-listed iAnthus Capital are solely focused on investing in companies in the cannabis space. When it comes to mitigating risk in cannabis investing, looking for companies with a diversified portfolio is a good way to spread out risk.
For those looking to invest in the cannabis space, go armed with knowledge when talking to your broker. Understand the risks and rewards and that there are many different types of companies with varying degrees of exposure to the plant that support the industry. Drug companies, capital firms and manufacturers of CBD-infused consumables are only the tip of the iceberg.
Companies like Microsoft, Oracle and Scotts fall into the category of “ancillary” businesses, meaning that they support the infrastructure of the industry without ever actually coming into contact with the plant. The ancillary group is wide and includes laboratories and analytics companies that are considered integral to the regulation and standardization of the cannabis industry.
There is certainly a Wild West nature to marijuana growing and selling, with consumers often not sure exactly what they may be getting. This is simply a byproduct of a gigantic industry that was operated in the shadows of the black market for decades. Being dubbed a Schedule I drug by Capitol Hill has been a major setback to medical initiatives, as it has meant that scientists couldn’t properly study the properties (pharmacokinetics, contraindications, side effects, efficacy, etc.) of cannabis in the clinical setting either. Over time, though, laboratories testing will result in defining, categorizing and better understanding a litany of cannabis strains, whether for recreational or medical usages.
When it comes to investing in the cannabis space, there is, of course, the obvious: cultivators, (those companies that grow the cannabis) and dispensaries. Countless companies have cropped up trumpeting their plans to become a premium grower or intentions of opening their own retail location to peddle cannabis goods. Don’t take their word for it. Dive into all the factors involved in such endeavors, including the fundamentals underscoring garnering a license to grow or sell, the number of licenses available, etc.
Growers and retailers lean heavily on countless other industry segments to achieve success. In addition to the aforementioned, these include, but are not limited to, delivery services, growing technologies (lighting and watering systems, temperature and humidity controls, greenhouses, etc.), consulting companies, real estate companies, facility developers and even cannabis-themed resorts, to name a few.
Being well-educated is critical in any investment environment, but perhaps the case could not be stronger than in one still in its infancy, like cannabis. The SEC has warned investors about potential fraud, as shysters abound a hot industry looking for easy prey. As we point out, there is a lot more to the cannabis industry than what is seen at first blush. There is a lot to explore and the more a person understands the complete and competitive landscape, the better their chances of finding success in one of the most explosive industries we’ll see in a lifetime.
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