The marijuana business certainly appears as if it could become one of the greatest things since sliced bread.
America's fastest growing industry
Over the last two decades we've witnessed Americans' views on marijuana as a whole shift from an approval rate of 25%, per Gallup, to slightly more than 50% as of its most recent poll in 2014. Further, the states themselves have been willing to take on regulation of the marijuana industry despite the federal government maintaining it as a schedule 1, and therefore illicit, drug. Since 1996, 23 states have legalized marijuana for medical purposes (as well as Washington, D.C.), and four states (and Washington, D.C.) have legalized the drug across the board for recreational use as well.
Momentum within the marijuana industry is only expected to gain steam. In 2014, the Colorado marijuana industry was worth nearly $700 million, with $386 million worth of medical marijuana being sold, and another $313 million in recreational product being purchased by consumers. This figure is expected to expand to $1 billion by 2016.
But, it's not just Colorado -- it's the entire U.S. that could serve as a stomping ground for marijuana's growth. According to the ArcView Group, a cannabis investment and research firm, the cannabis industry grew 74% in 2014 to $2.7 billion as it was helped by improved public perception of the drug, and legislation that's allowing the drug to be sold in legal states. By 2019, ArcView estimates marijuana could be almost an $11 billion market. We're talking a growth rate of more than 30%, per year, and according to ArcView, that makes cannabis the fastest growing industry in the country!
To an investor that would normally sound like music to their ears. But I believe the reality is that marijuana and your money are, in actuality, a very bad combination.
Your money could go up in smoke
Examining the numbers above does make it difficult not to get excited about the prospect of investing in marijuana stocks. Public perception and new state legislation would appear to imply that change could be on the horizon. However, there are a handful of reasons why investing in marijuana could cause your hard-earned money to go up in smoke.
One big problem with marijuana and your money is that there just aren't very many reputable investments to choose from. GW Pharmaceuticals is a mid-cap developer of some five-dozen cannabinoid compounds, including Epidiolex for two rare forms of childhood-onset epilepsy, and Insys Therapeutics is a mid-cap drug developer aiming to get an oral formulation of dronabinol (which contains the CBD cannabinoid) utilized as a second-line chemotherapy-induced nausea and vomiting therapy. Insys is almost wholly dependent (currently) on its nonmarijuana products, so it's even a bit of a stretch to call it a "marijuana play."
Aside from these two companies the typical investor has nothing else to choose from on a reputable exchange, such as the NYSE or Nasdaq. This is a concern because reputable exchanges require listing companies to maintain strict reporting guidelines. This means over-the-counter and pink sheet marijuana stocks, of which there are more than a dozen, are under absolutely no obligation to report the basic information you'd need to know before investing, such as whether or not a company has any revenue or a product for that matter, how much a company lost last quarter or last year, how much cash a company may have on the books, and in some cases what a company even does in the first place! If you don't have access to this information, you might as well kiss your hard-earned money goodbye.
Another key point is that Congress and President Obama haven't made marijuana a priority, and it's unlikely to become one for many years to come. Although President Obama has suggested that additional states legalizing marijuana for medical use could prompt Congress into action, and he's acknowledged that public opinion on marijuana is shifting, he also notes that America's youth should be focused on bigger issues with this country other than marijuana. In other words, marijuana legislation is taking a backseat to more important issues, and thus its expansion will remain somewhat constrained.
Financing is another potential problem for marijuana businesses. A typical business would head to a bank or their local credit union for a loan to open or expand a business. Legal and licensed marijuana businesses would prefer to do the same; however, some banks simply won't lend to marijuana shops. The reason is that the federal government still holds the marijuana plant to be illegal, and rather than risk any sort of federal prosecution (even in a legal state) banks are simply bowing out of loaning money to the marijuana industry. It makes opening up a shop or becoming a grower very difficult.
This is going to take time
There are multiple other reasons I could get into why marijuana might be a bad investment, but the above are the big three reasons why I believe you should be avoiding the industry in its entirety.
However, keep in mind that the logistics here could eventually change. I'm not denying that marijuana has momentum or saying that marijuana may not have medically beneficial properties. We've witnessed in studies that marijuana can have positive effects on certain diseases. Additionally, marijuana is bringing in money via taxes that states can use to help support education or create jobs. There are plenty of potential benefits to a society where marijuana is a legal drug.
Unfortunately for supporters of marijuana the winds of change are going to take time. Ongoing research into marijuana's risks versus benefits, and the multistate experiment whereby marijuana was legalized across the board, need time to mature before Congress or the president take any definitive action.
Perhaps one day marijuana and your money will be a good match, but for now the idea of investing in the marijuana industry appears to be a terrible idea.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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