How To Invest In The Legal Cannabis Industry
Despite legal, political, and business uncertainty, there are a few small companies in the legal marijuana business that are open to investing. Because cannabis is legal in some states but not at the federal level, to invest in the legal marijuana industry is complex. The legal uncertainties add business and political complications to the market.
While arguably one of the fastest-growing and most profitable new markets, legalized marijuana is also one of the riskiest markets in the world for investors.
“There is a tremendous amount of homework to do,” says Morgan Paxhia, co-founder and managing director at cannabis hedge fund Poseidon Asset Management.
“But, at the same time, we don’t want to turn people off from something that could be a huge winner. No other marketplace ‘s offering this much growth in the world.”
Retail sales of legal cannabis have skyrocketed over the past few years. From $4.8 billion in 2014 to $5.4 billion last year, pot profits are projected to reach as high as $22 billion by 2020.
Most public marijuana companies trade in the over-the-counter markets. These stock markets are less liquid, transparent and regulated than large markets such as the Nasdaq.
The SEC (Securities and Exchange Commission) has warned investors about potential fraud in the industry.
“If you’re talking about public companies, buyer beware,” Roper says. “Never invest more than you can afford to lose.”
That leaves potential investors weeding through a large field of penny stocks. Many investors are choosing to sit on the sidelines until the legal uncertainty of the marijuana industry clears up.
How to Invest
Investors who do want to take the plunge should make sure to invest in sub-sectors of the industry that aren’t at risk of rapidly changing laws.
Medicine Man Technologies, for example, is one of the dozens of public marijuana-related companies. But in the U.S., most of these enterprises are related businesses like social media, lighting, consulting, facility development and delivery and security services.
The health and wellness part of the industry, such as topical oils for arthritis, could be a blockbuster, says Frank Lane, President of CFN Media, a cannabis industry media, and advertising network.
One of Paxhia’s top picks is Denver-based MassRoots, a cannabis-related social media network expecting to hit a million users this month. If marijuana is legalized federally, the biotech space will benefit the most. Current law makes medical research tough, though.
Other areas that stand to grow are infused products, cultivation, and retail, real estate, and software, says Scott Greiper, President of cannabis industry consultancy Viridian Capital Advisors.