Investing in Marijuana: A High-risk Green Rush

It wasn’t too long ago that selling marijuana could get you a one-way ticket to the big house. But now, as more states move forward with legalizing marijuana, that trip to the big house can turn into a trip to the bank.
The legalization of marijuana in the US has lit a spark with investors who are turning their focus to the small — but rapidly expanding — medical marijuana industry.
“Everybody is running toward this as the next entrepreneurial wave — the green rush,” Robert Frichtel, CEO of Advanced Cannabis Solutions, told Bloomberg Businessweek in a January 2014 interview.

A long-term play?

And indeed, the sector has already seen significant growth. A report by leading marijuana industry and investment research firm ArcView shows that sales of legal cannabis climbed 17 percent, to $5.4 billion, in 2015 and look set to grow an even more significant 25 percent in 2016. What’s more, sales may grow to a whopping $21.8 billion in 2020.
Those numbers may sound impressive, but many market watchers are calling marijuana a long-term investment. That’s because as with any new opportunity, there is a fair amount of risk in investing in marijuana. Those risks and challenges include the overarching decriminalization of marijuana at the federal level in the US, among other regulatory threats.
Penny stocks are also a risk — in the past, the Financial Regulatory Authority has even warned investors to be on the lookout for marijuana stock scams.
Overall, however, it seems that despite any concerns market watchers might have, the cannabis industry isn’t going to go up in smoke any time soon. “Business is very good,” Frichtel told The Globe and Mail. “We are in the early stages of what’s going to be a very large industry over time.”

And indeed, “over time” seems to be the key statement. Alan Brochstein, a financial analyst in Houston who runs 420investor.com, told the Globe, “[e]verybody wants to get rich real quick, and that’s not the best way to look at these companies … You need to think long term.”
“It’s a multibillion-dollar industry,” Brochstein added. “These companies that people can buy right now are just a teeny, tiny fraction of the industry. They get a lot of focus because people can invest in them, but the reality is that better companies are going to be what you want to invest in. It’s just a question of when they come.”
Wall St. Cheat Sheet has echoed the sentiment that investors should steer clear of marijuana stocks — at least for the moment — as prices are especially elevated. Instead, the publication suggests that those investors who can ignore the high of the speculative investments look for companies that are “poised to capitalize on the evolution of the market.”

Investor takeaway

But what companies are those exactly? There are many choices, and often a good place to start is by looking at expert recommendations. The Investing News Network recently interviewed Derwin Wallace of Cannabis Investor Webcast for his thoughts on North American cannabis stocks, and more stock picks can be found in our recent cannabis investing outlook.

 
Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any of the companies mentioned in this article.