Whoever said “money doesn’t grow on trees” clearly wasn’t a stoner or a stock broker. The US market for legal cannabis grew from $1.5 billion in 2013 to $2.7 billion in 2014 making it the fastest growing industry in the U.S. according to findings from a ArcView Group market research study published in 2015. The report predicts that legal marijuana sales will generate as much as $21.8 billion by 2020. As a result, cannabis is arguably the best aggressive growth opportunity the market currently has to offer!
However, the risks of investing in marijuana stocks are much higher than the potential payoffs. The marijuana composite index is very volatile primarily because cannabis is still federally illegal. The volatility is also due to “novice investors who are flooding into the stocks on the promise that they’ll find riches with the decriminalization/legalization of marijuana,” according to Simon Burns, an Openfolio representative. Some experts still suggest however that the time to buy marijuana stocks is now before the barriers to entry become too high. This post will cover everything you need to know about the high potential returns of marijuana stocks, the Securities and Exchange Commission (SEC)’s warnings about cannabusiness scams and how to begin investing in the marijuana penny stocks.
A single marijuana plant can produce about a pound of smokeable product which is worth approximately $3,000 U.S. dollars in today’s market. However that same plant could garner nearly $10,000 if it’s buds are extracted for cannabis concentrates. The labor involved in extracting the cannabis concentrates that we vape, dab, make tinctures, oils and edibles with is the basis of the fastest growing sector in the Colorado retail pot industry. This value-add between low production prices and high potential sales prices for many pot-related products is why novice and expert investors alike are attracted to the emerging legal marijuana industry.
Pot Industry Pitfalls
Many people such as celebrity legalization activist Cheryl Shuman lost money on “pump-and-dump” penny pot stock schemes in 2014. 2015 wasn’t a good year for marijuana stocks either according to Marijuana Business daily whose marijuana stocks plummeted.
The current volatility of the legal weed industry and its respective stock prices is due to the fact that cannabis is still a schedule 1 controlled substance with no known medicinal value according to the Drug Enforcement Agency (DEA). This is why the Financial Industry Regulatory Authority (FINRA) will not allow any cannabis company to file an S-1 form in order to register with the Securities and Exchange Commission (SEC) and launch an Initial Public Offering (IPO) of stock on the open market. Cannabis company shares are only traded on unregulated “over-the-counter” markets as opposed to public markets managed by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Every cannabis company with a tradable stock was created by a process known as reverse mergers in which private companies trades shares for stock of a public shell company thereby effectively making the private shares public without having to register with the SEC and FINRA or comply with their public accountability requirements. These unregistered stock offerings are typically sold by small companies as microcap or penny stocks for less than $5 dollars through over-the-counter (OTC) security exchanges also known as Pink sheets which do not require companies to file with the SEC. This means that opportunities for fraud and scams abound in the fledgling market.
The valuation of many marijuana stocks that typically spend more than they earn is based upon the speculation of high returns and on “scientific sounding names” more so than from actual revenue from sales and profits. “The only hope of profiting” off of a marijuana stock now according to Dan Steinhart, executive editor of Casey Research, “is for a greater fool to come along and buy it from you at a higher price.” The SEC issued suspensions for five shady cannabis companies for lack of publically available information, market manipulation, and potentially illegal sales of market shares in May of 2014. The SEC also warned to be wary of fraudsters spreading false information to make profits for themselves at the expense of unsuspecting investors. The fact of the matter is that most marijuana stocks simply aren’t running honest businesses.
Another “Chief” Concern
The only reason that the legal cannabis industry exists in its present form is because our current Commander in Chief has chosen to allow individual states to regulate marijuana sales. The fledgling, unregulated marijuana market, moreover, will likely either surge or plummet based largely upon whether or not the winner of the 2016 presidential election supports marijuana legalization. Vermont Senator Bernie Sanders is thus far the only 2016 presidential candidate to receive an A from the Marijuana Policy Project for his stance on legalization. In November of 2015, Senator Sanders proposed legislation that would remove cannabis from the federal drug schedules, allowing states to legalize and regulate marijuana for medicinal and recreational use.
To Invest or Not To Invest?
StreetAuthority writes about the best aggressive growth opportunities on the market for NASDAQ.com but says “I cannot advise anyone to take a position in the market as currently constituted” in spite of the author’s admitted personal interest in pot as well. StreetAuthority estimates that the right time to invest in marijuana will be five to seven years from now when cannabis may potentially be dropped from the DEA’s list of controlled substances allowing cannabis companies to register with FINRA and publicly offer their stock on the major exchanges.
However StreetAuthority also suggests that big pharmaceutical companies will step in to meet consumer demand as soon cannabis is no longer federally recognized as a lethal drug which is why John Persinos of TheStreet writes that the time to invest is now before the barrier to entry becomes too…high. Dan Ritter argues that not every company in the industry is a “pump and dump scheme” and that “investors should be able to tell the difference between a viable investment candidate and a scam”. He suggests examining the company’s reporting history, transparency, management and any existing SEC Filings. FINRA cautions to research the source of the stock, to be wary of frequent changes to a business’ name or area of focus and to make sure that whoever is selling you the stock is properly licensed using FINRA’s BrokerCheck before purchasing any over-the-counter marijuana stocks. Your safest investment strategy is to thoroughly research the marijuana stocks that your are interested in, so as to avoid being scammed.
How To Enter The GreenRush
You’ll want check out marijuanaindex.com and marijuanastocks.com to find specific marijuana stocks to invest in if you’re a serious cannapreneur who thinks that right now is the best time to enter the emerging multi-billion dollar marijuana market. Then you’ll need to open a brokerage account with an online discount broker such as Scottrade or with a traditional full-service brokerage firm in order to actually facilitate your trades.
Pot Stock Investment Pro-Tips
Frontier Financials Group co-Founder Rick Gilchrist suggests investing in completely legal businesses around the marijuana industry which don’t directly deal with the plant. This includes cannabis tourism, businesses that make legal growing, harvesting and extracting equipment, stylish child-proof pot containers, and businesses that make pot paraphernalia products such as vaporizers, custom glass pieces and apparel.
Companies that work with industrial hemp, the male version of the cannabis plant which doesn’t produce any psychoactive THC, may make their way onto the stock market faster than medicinal and recreational cannabis companies. Hemp can be used for to make environmentally friendly food, clothing, building materials and non-psychoactive medications from extracted CBD oil. There’s significant bipartisan political support behind a bill to remove hemp from the schedule one drug list as well.
Making “Cents” of Marijuana Stocks
Investing in unregulated marijuana stocks is certainly a risky investment at the moment. However, the costs of buying stock in cannabis companies will likely only grow more expensive over time. The outcome of the 2016 presidential election will largely determine how soon cannabis can be removed from the DEA’s list of illegal controlled substances which will allow cannacompanies to register with FINRA and publically sell shares of stock. Until then however, many experts suggest that legal ancillary businesses revolving around the plant’s agriculture, industrial (hemp) production, legal weed tourism, entertainment and paraphernalia are the safest opportunities for investment.