This article was updated on January 8, 2018, and originally published on March 20, 2017.
In terms of growth, you'd struggle to find an industry that's been piling on the dollars on a year-over-year basis faster than marijuana -- and it's rightly getting the attention of investors. Over the past five years, cannabinoid-based drugmaker GW Pharmaceuticals (GWPH) is up nearly 1,400%, while a company called Medical Marijuana, which trades on the over-the-counter exchanges, has had three separate instances since 2012 where its stock has rallied between 300% and 1,000%.
Huge moves like these are known for attracting investors, both big and small. However, blindly investing in an industry, even the marijuana industry, is rarely ever a good move. Before you invest in marijuana stocks, there are a few things -- 15 to be precise -- that you need to know.
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1. Marijuana's growth rate is top notch
Investors really will struggle to find an industry with a more consistent long-term growth rate than marijuana. Cannabis research firm ArcView estimated North American legal sales growth at 34%, to $6.9 billion in 2016, and investment firm Cowen & Co. is forecasting up to $50 billion in legal pot sales by 2026. Between 2016 and 2026, this works out to a growth rate of more than 23% annually. Those are growth figures that make investors drool with anticipation.
2. The public strongly supports its legalization
As a whole, Americans want to see marijuana legalized across the country, or at worst, decriminalized. Gallup, which has been conducting polls on pot with some regularity for nearly 50 years, found that 64% of respondents as of Oct. 2017 wanted to see weed legalized nationally, up from 25% back in 1995. A separate study from the independent Quinnipiac University in August 2017 found overwhelming support (94%) for the national legalization of medical marijuana.
3. One group still opposes legalizing marijuana
Though the general public wants to see marijuana legalized, one group still opposes cannabis. According to Gallup's 2016 survey, just 45% of seniors supported the idea of legalizing weed nationwide. It should be noted that seniors have softened their views on marijuana and increased their support over the past decade, but progress on Capitol Hill with regard to marijuana's legalization remains slow.
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4. There's no shortage of marijuana stocks to choose from
If investing in marijuana stocks is on your agenda, you'll certainly have no shortage of companies to choose from. There are dozens of publicly traded marijuana stocks, though most of the publicly traded companies tend to be pretty small in terms of market cap. The aforementioned GW Pharmaceuticals is one of the largest pot stocks, with a valuation of roughly $3.7 billion.
5. Most pot stocks trade on the OTC exchanges
Because reputable exchanges like the New York Stock Exchange (NYSE) and Nasdaq have market-cap and share-price requirements, the vast majority of marijuana stocks trade on the over-the-counter boards or pink sheets. The good news for investors is that the over-the-counter (OTC) exchanges have done a good job of ratcheting up listing and reporting standards over the past couple of years. However, they're still no NYSE or Nasdaq. This can make it quite difficult for investors to get up-to-date and accurate information on the marijuana stocks they're considering for their portfolios.
6. Many marijuana stocks are losing money
Another issue that investors should strongly consider is that many marijuana stocks are currently losing money. Back in the late 1990s and early 2000s, losses were overlooked for internet-based companies with the thinking that their top-line growth would save the day. This soon led to the dot-com bubble. Fundamentals always matter. The big question to consider is whether these cannabis companies have the capital to survive the early years and development of the legal pot industry.
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7. Monopolies are beginning to gain hold
The marijuana industry is primarily segmented, with many smaller businesses operating in the retail, growing, and processing side of the equation at the state level. However, states like Colorado have begun to see a larger infiltration of big businesses. A moratorium on recreational pot licenses has allowed big business in Colorado to scoop up many of the available licenses, while in Washington, bigger businesses are flooding the market with product. While these moves in Colorado and Washington state could pave the way for a big business takeover of the industry, it also means lower margins in the meantime.
8. Cannabis businesses have little access to banking
As has long been the case, pot stocks don't have much in the way of access to financial institutions. Banks ultimately report to the federal government via the Federal Deposit Insurance Corporation, and since the federal goverment deems marijuana to be a schedule I substance, providing a checking account or a loan to a marijuana business could be viewed as money laundering. With so few basic banking options, most cannabis businesses are forced to deal solely in cash, which is a major security concern and an inhibitor of growth.
9. U.S. tax code 280E is a nuisance
Weed stocks also face a major tax code disadvantage known as 280E. The Internal Revenue Service disallows businesses from taking normal business tax deductions if they're selling a substance that the federal government deems is illegal -- and marijuana most definitely is illegal. This means marijuana businesses are likely paying tax on their gross profits instead of net profits, leaving them less money to reinvest, hire, and buy new product.
Image source: U.S. Department of Homeland Security, Flickr.
10. The Trump administration may crack down (further) on pot
The Obama administration maintained a very hands-off approach to marijuana, allowing states to handle the regulation of their medical and/or recreational pot industries. But, the Trump administration has signaled it won't be as lax. Attorney General Jeff Sessions' Jan. 2018 announcement that the Cole memo would be rescinded -- the Cole memo provided a loose set of rules that states would abide by in order to avoid federal interference -- is one example of how the current administration may step up enforcement. With the Cole memo rescinded, state prosecutors may be able to bring charges against pot certain pot businesses.
11. Attorney General Jeff Sessions is no fan
To build on the previous point, new Attorney General Jeff Sessions is a major opponent of the marijuana industry. Sessions doesn't believe marijuana is a drug that good people use, nor does he believe that it can make a difference in reducing the opioid epidemic in America. While Sessions commented during his confirmation hearing that he would abide by the president's policy on pot, he wants nothing more than to stamp out any opportunity for marijuana's expansion, and his latest actions prove this.
12. The DEA is no fan, either
The U.S. Drug Enforcement Agency (DEA) had an opportunity in the summer of 2016 to consider rescheduling or de-scheduling marijuana, but chose not to. The DEA pointed to a lack of clinical benefits and safety data, as well as insufficient oversight, as its reasoning why it was keeping cannabis as a schedule 1 substance. Because petitions can take so long to work their way up to the DEA, it's unlikely that it'll give cannabis another look for years to come.
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13. A congressional Catch-22
Aside from Congress being made up of a majority of Republicans who tend to have a mixed view on marijuana, Congress's staunch stance on keeping pot as a schedule 1 substance creates an annoying Catch-22 for the industry. Lawmakers on Capitol Hill want more clinical data to pore over, but those trials can't be run as long as cannabis remains in the restrictive schedule 1 status. Even promising clinical products, such as GW Pharmaceuticals' Epidiolex, which met its primary endpoints in late-stage studies to treat two types of childhood-onset epilepsy, are no sure thing to be approved by the Food and Drug Administration (FDA).
14. State expansion may slow
The marijuana industry has numerous expansionary channels, but the industry may soon have to rely on organic growth if it wants to move the needle. Between Trump, Sessions, and the DEA on Capitol Hill, and the fact that many of the remaining medical marijuana states that haven't legalized are under Republican control, state-level expansion may wind up slowing in the years to come.
15. Rescheduling could be a nightmare
Finally, it's important for investors to realize that a rescheduling of marijuana at the federal level isn't necessarily a solution. Even if Congress or the DEA moves marijuana down a notch to schedule 2, it could make things even worse for the pot industry.
While a schedule 2 status would recognize cannabis as having medically beneficial qualities, it would also give the FDA the power to tightly regulate pot as a drug. This means regulating marketing and packaging of medical cannabis, overseeing its manufacturing, and possibly even requiring companies to run costly and time-consuming clinical studies on the benefits and safety of marijuana.
As you can see, investing in marijuana stocks is probably a lot more complicated than you may have realized at first. In many ways, they could prove to be more trouble that they're worth, in spite of their superior growth rates.
