Marijuana has inspired the medical community and the investing community, with state legalization spurring interest in companies related to the drug. Yet many fear that the tiny companies that dominate the marijuana industry right now aren't good investments and carry too much risk for the typical investor.
With that in mind, we asked three Motley Fool contributors to weigh in on their views about whether marijuana is or will be a place to invest in the near future. See what they have to say and then weigh in with your comments below.
Jordan Wathen: I don't think the majority of the marijuana business will ever be a viable investment opportunity. First, the cultivation of marijuana is commoditized, no better than the farming of traditional crops. When everyone operates with the same basic commodity inputs, generating an outsize return is next to impossible.
Todd Campbell: It certainly seems to me that marijuana legalization is increasingly becoming the norm and if so, then I think an argument can be made that marijuana businesses could be as investment-worthy as beer, spirits, wine, and tobacco companies.
There's likely to be an evolution in how the marijuana investment opportunity develops. At the beginning, small individual growers and distributors (think family funded and run) will dominate, but as they become increasingly profitable, larger companies and start-ups funded by venture capital will come into the mix, leveraging scale for greater profitability the way tobacco companies did.
Eventually, these midsize players will get rolled up into even larger publicly traded companies. Additional investment opportunities could also emerge for companies developing and marketing seeds, supplies, and equipment. Finally, specialty products could emerge, similar to what has happened in the craft beer market. Obviously, all this depends on widespread legalization -- something I think has a good shot at happening. If it doesn't, then the investment opportunities will mostly depend on clinical success in trials that are being conducted by biopharma companies studying the use of chemical cannabinoids across various diseases, such as cancer and epilepsy.
Dan Caplinger: I think marijuana will become just as legitimate an investing opportunity within the next decade as any other legal product, with trends moving toward legalization in many states that have seen the largely successful experiments in Colorado and Washington pan out reasonably well. However, investors shouldn't expect pure-play marijuana stocks to last long beyond legalization of the drug before bigger players start to dominate the space.
Going forward, investing in marijuana will depend on exactly which course policymakers take. If future laws emphasize the medical aspects of marijuana use, then major pharmaceutical and over-the-counter healthcare companies will likely use their superior distribution models to grab up any profit opportunity in the space. On the other hand, if full legalization occurs without any ties to medical use, then you could easily see tobacco companies take advantage of the opportunity to market marijuana cigarettes to a willing customer base.
Investors also need to be prepared for more pedestrian returns from the marijuana space. Government taxes will likely stay high, but overall, prices could fall dramatically from current levels if marijuana becomes fully legal. That will limit profit potential from the drug, but demand for the product is still likely to be high enough to warrant investor interest in the companies that pursue it.
Dan Caplinger has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.