Alan Brochstein on Investing in Cannabis Stocks

Investing in cannabis stocks can still be a bit of a mystery. A number of states and provinces in Canada and the US are in various phases of legalization for both medical and recreational marijuana use, making it difficult to know what sort of fundamentals to look for.
To get a bit more insight into the space, the Investing News Network got in touch with Alan Brochstein of 420 Investor. In the interview below, he speaks about the current state of the market, cannabis stocks he likes, and what to look forward to in terms of positive catalysts.
Overall, while he believes the 2014 pot bubble may have scared a lot of investors off, things are getting a bit better for cannabis stocks and the marijuana market.

The state of the market

For starters, Brochstein clarified that the cannabis market in 2014 was a trading market. Rather than being full of quality companies with long term investors, “it was a big momentum trade,” he said.
“I’ve been following the industry for a little over 3 years now, and the public markets are still pretty much not invest-able,” he added, “but the good news is, it’s getting a little bit better.” Brochstein stated that the cannabis market has been in a long downward slide, with the index that he creates losing over 95 percent of its value. However, the index is slowly starting to recover, and the market is now in a resurgence.
What’s driving that turnaround? One catalyst Brochstein pointed to was the release of phase 3 clinical trial data by GW Pharmaceuticals (NASDAQ:GWPH) in March for its drug Epidolex. GW saw its stock double on the news, and the company hopes that its study of the epilepsy drug will confirm the therapeutic benefits of cannabinoids. “That kind of sparked the market,” Brochstein said.
In terms of what to watch for going forward, Brochstein pointed to two catalysts he sees on the horizon:

• The UN Special Session of the United Nations General Assembly on the World Drug Problem; Taking place on April 19-21 2016, the meeting of the United Nations General Assembly is definitely something that Brochstein is watching. “You could have kind of a global change with how nations view Cannabis,” he said.

• Legalization initiatives in the US; In November there’s probably going to be five to nine legalization initiatives on the ballot in the US,” Brochstein said. “That’s a real tradeable event.”

As far as longer term investments go, Brochstein stated that the market is not quite there yet, but as mentioned above, he is seeing improvements.
“On the investment side, there are definitely a few more good companies,” he said. “The valuations aren’t super compelling. They’re not going to appeal to institutional investors most likely. So we’re not quite there yet. But we’re starting to see some real companies with real revenue and they could have better corporate governance.”

Cannabis stocks to watch

While Brochstein reiterated that the valuations he’d like to see are not necessarily there for cannabis stocks yet, he did have a few examples of public cannabis stocks that he’s keeping an eye on. They were

• Indoor Harvest (OTCMKTS:INQD)

• MassRoots (OTCMKTS:MSRT)

• Medicine Man Technologies (OTCBB:MDCL)

“These are all companies who have kind of done things the right way in terms of how they’ve gone public, instead of going through reverse merger,” he said. He also pointed to GW Pharmaceuticals, mentioned above, and to Kush Bottles (OTCMKTS:KSHB), although he currently believes that particular cannabis stock is too expensive. 
In terms of the three companies mentioned above, Brochstein spoke about how MassRoots is helping marijuana companies to connect with brands, retailers and end users. “Advertising is really hard in this industry, because you can’t use billboards, you can’t use radio or television,” he said. “Facebook, Instagram, all these social media networks are shutting down company pages. This is an end-around closed system to allow people to use social media when they can’t use their normal social media. So it potentially solves a big problem.”
That said, Brochstein sees a potential issue in the sense that the platform appeals more to the young crowd than to newer users of medical cannabis. “It’s not going to appeal to kind of the more interesting market to me, which is people in their middle ages who are coming back to cannabis, substituting cannabis health and wellness products for pharmaceuticals,” he said. “[Massroots] is of no value to these people.”

Legalization

Of course, the legalization of marijuana, either for medical or recreational use, is always a subject that is top of mind for cannabis investors. Brochstein has his own predictions about when investors can expect to see changes in Canada and the US.
“In Canada, I’m very optimistic that it’s going to happen, but I’m pessimistic about the timing,” he said, stating that there will be a number of federal, provincial and local issues to deal with before all is said and done. “I tell my subscribers, don’t expect it until January 1st 2018,” he added. “And that may be early.”
Similarly, in the US, Brochstein believes that the federal legalization process will be longer than many expect. “Two or three years ago, I was loudly forecasting 2020, for federal legalization. I no longer believe that to be the case. After having watched and studied. And I don’t want to say it’s going to be 2024, but somewhere in between those two years maybe.”
That said, there could be a few exciting catalysts to watch for at the state level. Beyond changes he sees on the horizon in California and Nevada, Brochstein stated that he is closely following the path to cannabis legalization in Vermont.
“The governor is for legalization, and they’re getting really really close to passing it legislatively,” he said. “That’s never been done before. That is a game changer, not only because it would happen without a vote from the citizens if it happens, but more importantly, that’s your first east coast legalization.”
Certainly, that’s plenty of food for thought for cannabis investors looking at the space.