Marijuana is increasingly becoming decriminalised and legalised in some states of the US, and in Canada. Institutional investors have been showing increased interest in investing in the industry, which is predicted to become a $50 million industry over the next ten years.
Currently, adults can legally consume marijuana in eight US states and Washington DC, and medicinal cannabis is legal for medicinal use in 28 states. It could potentially become regulated in all US states soon.
Because of this, some have said that investing in marijuana now could be like getting in on alcohol before the end of the Prohibition. Potentially a huge opportunity.
So, should you invest in this “high risk, high return proposition?” Well, before we go over the risks and potential rewards, here is what Marketwatch thinks we should know:
What should you consider before investing?
The main thing to note here is that as of March 2017, Marijuana is still illegal on a Federal level in the US. This means that technically, the Drug Enforcement Administration has a remit to catch and prosecute growers and distributors.
The Obama administration was visibly lax and hands-off on the issue, allowing states to decide policy for themselves, and defunding the DEA’s efforts to stop medical Marijuana in states where it is legal.
However, a huge unknown is what Trump’s stance will turn out to be.
Even if the Trump administration carries on Obama’s legacy of lenience, the illegality of the drug is a huge hurdle to cross. FINRA, the Financial Industry Regulatory Authority, which regulates of Wall Street, has blocked an S-1 filing from marijuana companies attempting to go public and trade stock until the drug is re-scheduled.
This means that until marijuana is declassified, companies that grow, distribute and sell the plant will not be able to trade on the US stock exchange.
So, for the moment getting involved in US marijuana companies is difficult and possibly very risky for the average investor. There are however some easier and less risky ways to get involved in the potential gold (or green) rush:
Invest in complimentary businesses that don’t touch the plant
There are plenty of businesses out there that offer goods and services that compliment the Marijuana business, and will grow because of it. Rick Gilchrist, founder of Frontier Financials Group, a cannabis industry intelligence company, has pointed out a number of examples:
- The Capsule Consulting Group makes empty, flavoured gelatin and vegetable based capsules for cannabis products
- Kush Bottles creates custom child resistant containers for retailers,
- Canna Flavors creates oil soluble flavor extracts for use in baked goods to mask the taste of marijuana
- GreenBroz makes a mechanical trimmer for marijuana harvesting, a completely legal machine.
Invest in Pharma companies with marijuana based products
There are a number of pharmaceutical companies that have developed products based on marijuana and it’s derivatives which constitute a less risky play, as they are not solely focused on the drug. Examples include:
Abbvie (ABBV), which has a marijuana-based nausea and vomiting relief drug, which has been approved by the Food and Drug Administration (FDA).
Insys Therapeutics (INSY), whose hunger stimulating drug for anorexics, Syndros is based on tetrahydrocannabinol (THC) and is approved by the FDA.
Invest in Canadian cannabis stocks
Canad a recently announced legislation to legalise Marijuana, so the country is potentially a much safer place to look for investmen opportunities.
The Horizons Medical Marijuana Life Sciences ETF (TSX: HMMJ) recently started on the Toronto Stock Exchange. It will include 11 Canadian listed stocks and four listed in the United States. (Exchange Traded Funds (ETFs) are marketable securities that track an index, a commodity, bonds, or a basket of assets like an index fund.)
Also on the Toronto Stock Exchange is Canopy Growth Corp (TSE:WEED), a group of companies which produces cannabis and a number of cannabis-related products.
So, should you invest in marijuana?
At the moment, this is a nascent industry with huge unknowns and possibly very high risks as well as potential big gains. Influencing factors include legal, political and geographic issues that nobody can predict, so if this is a sector that interests you, move very cautiously and do your research.
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