Investing in the marijuana industry has always been a risky proposition fraught with uncertainty. In the past five years or so, savvy investors have provided the nascent sector with a cash infusion in hopes seeing a healthy return on their investment. But what about now under the Trump administration? Are investors still Bullish on marijuana with Trump in office?
It depends on who you ask. From a pure financial view, not a lot has changed since Donald Trump was sworn in as the 45th president. But politically, the picture has become blurred.
Last month, White House press secretary Sean Spicer said that he expects states to be subject to “greater enforcement” of federal laws against marijuana use. Although the statement was vague and seemingly void of policy, it had a chilling effect throughout the industry.
“While the cannabis industry has been anxious to gain more clarity into how President Trump’s Administration is going to treat the legal cannabis market in the U.S., it has also provided the opportunity for rigorous debate on the issue,” said Giadha Aguirre de Carcer, the CEO of New Frontier Data, a data analytics firm.
Legal adult use of marijuana has a legal foothold from coast-to-coast, and American attitudes toward legalization is growing stronger than ever before. The legal market in the U.S. generated about $6.7 billion last year. Some experts forecast that the market will skyrocket to $21 billion in four years.
A recent Quinnipiac poll revealed that 93 percent of Americans support legalizing marijuana for medical purposes; 59 percent favor full legalization for adults.
But popularity does not make for sound investment strategy. Serious investors seek clarity — something not found in the cannabis industry. And marijuana businesses must deal with issues that no other sector has. Most cannabis businesses have limited access to banking services, such as a checking account or line of credit. Marijuana remains federally illegal and banks must follow federal laws. Marijuana businesses are also unable to take normal tax deductions.
Despite the hardships and not-so-friendly laws, smart investors are still investing. Here are a few things to consider if you are weighing whether to invest in cannabis or not:
1. Knowledge Is Power
Just like any other sector, you need to do your homework. And unlike any other sector, the marijuana industry is more complex.
“From an investment perspective, the federal ban actually creates significant opportunities since it limits options for traditional financing,” according to Chris Ganan, Chief Strategy Officer at MedMen, a leading cannabis investment firm. “Given the large addressable market and the general lack of liquidity, much has been written about the ‘Green Rush.’ It is easy to get caught up in the novelty of it all. But here’s a newsflash; the cannabis industry is governed by the same fundamentals that govern every other industry.
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Related Story: So You Want To Take Part In The Green Rush
“Knowledge is still power, and it boils down to evaluating and mitigating risk,” Ganan added. “The regulatory environment is highly fragmented and rapidly evolving. Understanding the various layers is key for investors to achieve outsized, risk adjusted returns.”
2. Read The Financial Reports
Check out the stock filings on the Securities Exchange Commission site or other exchange sites. Make sure to take a hard look at the revenue figures. Is there money being deposited regularly? From where?
Just like the tech boom (and bust) in the late 1990s, there are a lot of businesses out there with fancy presentations but no income. Don’t be duped by flashy promises. Perform your due diligence and focus on the financials.
Be wary of pump and dump schemes. If you see a company getting a lot of ink on investment sites, double down on your homework. There are a lot of instances where a company will pay for promotion to drive small bumps in the stock price. The insiders will benefit and you’ll be left holding a worthless penny stock.
3. Look For Established Companies
There are a few large companies that are in play in the cannabis sector.
- GW Pharmaceuticals is the maker of the experimental drug Epidiolex, which treats epilepsy. According to the company, there are about 470,000 children with epilepsy in the U.S. and about one-third of them will benefit from the drug.
- Scotts Miracle-Gro has been busy acquiring hydroponics companies in the U.S. Fertilizers, topsoil and other agricultural products are also needed in the fast-growing marijuana business.
- Insys Therapeutics is the maker of a drug that treats chemotherapy-induced nausea and vomiting. The THC-based drug Syndros was approved by the FDA last year.
- Corbus Pharmaceuticals makes Resunab, an experimental anti-inflammatory drug. The drug is still undergoing clinical trials, but it shows promise.
NOTE: These are suggested companies, not recommendations. Please read tips #1 and #2 before investing.
4. Picks And Shovels
This old expression was derived from the California gold rush, where many of those who profited did so by selling the miners picks, shovels and other equipment needed for gold mining. It wasn’t gold that got them rich, it was the ancillary businesses.
In the cannabis industry, there are a lot of businesses out there that may be worth investing in that do not have much to do with the plant. Scotts Miracle-Gro would be an example. Other emerging sub-categories are lighting, agricultural equipment, insurance companies, accountants, media outlets, etc.
5. Final Thoughts
Yes, investing in cannabis is trickier than most sectors. The new administration’s lack of clarity is a cause for concern, but the uncertainty is not new.
If you follow basic investment principles and perform extra due diligence, you may do well.
