Three Concrete Tips for Navigating the Hazy World of Cannabis Investing
The projections are intoxicating: By 2020, sales of legal cannabis in the United States and Canada are predicted to hit over $40 billion annually. These are the kind of new-industry numbers that tempt even the stock-market averse to consider how they might get in on the action, but investing in the legal cannabis world remains an iffy business. Much of the iffiness comes from the US, where eight states and counting have legalized adult-use cannabis despite the fact it remains illegal under federal law—a discrepancy that leaves federally affiliated banks and investment firms prohibitively wary (especially in the renewed drug-war atmosphere of the Jeff Sessions era).
So thank God for WealthManagement.com, an organization so devoted to wealth management they put it in their URL, which recently issued “An Advisor’s Guide to the Cannabis Industry,” which attempts to bring some clarity to the convoluted world of cannabis investing.
Wisely, writers Dan Weil and David H. Lenok begin by acknowledging the trickiness of the terrain: “Cannabis is still considered a Class 1 drug, like heroin, and is illegal under [US] federal law. That prevents banks and other larger financial institutions from providing investment capital or even a payments infrastructure behind the ‘budding’ industry, and invites a fair number of outlaws, reckless money managers and fly-by-night stock operators looking to make quick profits.”
For those up for an investing adventure in this highly changeable terrain, the guide offers plenty of informed help. Three main takeaways:
“Don’t Touch the Plant”
As the Advisor’s Guide notes, “Companies growing and distributing the plant itself will provide potentially the highest returns, but also have the highest risk due to the capricious nature of legal enforcement.” So low-drama investors would do well to aim not at cannabis businesses, but at cannabis-adjacent businesses, which provide services to the cannabis industry and its consumers without engaging with the plant itself. Among the best bets: greenhouse builders, providers of lighting-technology and hydroponic growing supplies, and cannabis-friendly gardening equipment. In other words: Don’t invest in gold miners; invest in shovel stores.
Be Wary of Over-the-Counter Penny Stocks
“Cannabis stocks all trade on what’s known as over-the-counter (OTC) markets,” writes the financial website Money Morning. “These are decentralized markets and exchanges with less regulation than the larger and more formal exchanges like the NYSE or Nasdaq. Since these OTC firms don’t need to submit detailed documents outlining their financials, they’re typically volatile and therefore very risky.”
The risks of OTC stocks don’t come without potential rewards—Money Morning cites a cannabis stock that climbed 12,400% during the first quarter, before plunging 68% less than one month later—but there’s plenty to be wary of.
“Recently there have been a number of penny-stock companies coming onto the market offering to bring Bitcoin payment solutions to the industry, filling the void left by commercial banks that can’t offer payment processing given the state-by-state patchwork of legality,” writes WealthManagement.com. But as financier Steve Gornley told Wealth Management, many of these companies resort to “toxic financing,” and often fall prey to shady investors looking to manipulate the company’s share price. Unless you’re craving Wolf of Wall Street adrenaline rushes, steer clear of the cannabis penny stocks.
Aim for the Private Sector
“Cannabis, like almost every industry that captures public attention, has its best opportunities in the private sector,” Troy Drayton, CEO of the Arcview Group, told Wealth Management. Among the private-equity firms investing in the legal cannabis industry: Seventh Point, Poseidon Asset Management, and Tuatara Capital, all of which are “trying to bring a level of financial maturity to a complex industry,” as Business Insider puts it.
“We launched Tuatara to create an entry point for sophisticated investors,” Al Foreman, CIO of Tuatara told BI. “It’s fascinating to be part of a new and emerging industry.”
Dave Schmader is the author of the book "Weed: The User's Guide." Follow him on Twitter @davidschmader
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