Marijuana Investing: This Bud’s For You
I’ve written scores of articles over the years about the marijuana industry, so it didn’t come as a complete surprise when my colleague Jim Pearce, chief investment strategist of Personal Finance, asked to interview me about pot stocks.
Personal Finance is our flagship publication and Jim is a seasoned analyst. From time to time, Jim is asked by his readers to recommend marijuana stocks, but he’ll be the first to tell you that there’s a lot of hyperbole surrounding these investments. It’s tough to find the right choices.
To help you pick the genuine money-making opportunities in “canna-business,” Jim and I sat down for a one-on-one interview.
Q&A: Finding the Right Pot Stocks
Jim Pearce: Is the marijuana “green rush” really a long-term bonanza or just a fad?
John Persinos: Oh, it’s real alright! Once a symbol of counter-culture rebellion, marijuana has evolved into a multi-billion-dollar industry. “Mary Jane” has moved from Woodstock to Wall Street, representing a disruptive force for a slew of industries, including pharmaceutical, tobacco and beverage companies.
The accelerating legalization of marijuana, and its concomitant growth as an industry, is one of the greatest investment mega-trends that we’ll see in our lifetimes. The potential profits are vast. Investors who jumped onto the bandwagon early are already getting rich. It’s like investing in the liquor industry in the 1930s, when Prohibition ended.
Recreational use of marijuana has become a mainstream pastime. In many cities throughout North America, you can stroll into a marijuana dispensary and casually buy pot as easily as you can buy a pack of chewing gum.
It’s not just about getting high, though. The consensus in the medical community is that marijuana possesses enormous healing properties.
Problem is, signs are emerging that the marijuana green rush is becoming a bubble in search of a pin. Sure, enormous opportunities for cannabis profits still abound. But we’re starting to see a proliferation of dubious investments.
There’s still plenty of money to be made in the marijuana industry, but many pot stocks are absurdly overvalued. I think consolidation and a brutal shake-out is coming, whereby a lot of thinly capitalized stocks will fall by the wayside.
Don’t get me wrong: There’s ample reason for investors to be bullish about small, fledgling marijuana companies. In fact, small-cap stocks will offer the most explosive gains in the marijuana industry. Not only do these companies give investors opportunities to get in at bargain prices and speculate on skyrocketing cannabis success, but they also make great takeover targets for Big Pharma companies looking to break into this nascent industry.
But when looking for marijuana investments, stick to quality. Emphasize growing revenue, actual profits, experienced management, and a solid balance sheet.
Why are so many marijuana companies based in Canada?
When it comes to legalized marijuana, Canada is in the vanguard. Our neighbors to the north have always had a permissive and tolerant society. This attitude has extended to marijuana.
In October 2018, Canada legalized on the federal level the possession and use of recreational marijuana. Canada was the first G7 nation to take this bold step and it triggered an earthquake in the worldwide marijuana industry.
In the U.S., 10 states and the District of Columbia have full marijuana legalization, and another 23 states permit medicinal uses with permission from a doctor. Pot remains illegal at the federal level, but that may soon change, as the normalization of marijuana in our country continues apace.
In March 2019, the U.S. House Financial Services Committee voted to pass legislation that would make it easier for marijuana businesses to access banking services. The marijuana banking bill is under consideration by the entire House, which is now run by marijuana-friendly Democrats. The bill is expected to pass in a matter of weeks and it stands a good chance in the Senate.
The proposed bill seeks to expedite the provision of financial services to cannabis companies by removing the fear of potential federal action against lenders. Many banks are reluctant to lend to marijuana businesses because of uncertainty over the industry’s legal status. If the bill gets signed into law, I expect marijuana stocks to skyrocket.
The marijuana industry enjoys a multitude of tailwinds and faces robust projected growth. The following chart tells the story.
What category of marijuana company do you think stands the best chance of survival?
As I mentioned earlier in this interview, I foresee considerable consolidation. Weak companies will go bankrupt and disappear altogether. Other companies that provide a valuable product or service but lack a competitive edge will get acquired. We’re already seeing a flurry of merger and acquisition activity among marijuana companies.
Avoid companies that provide the marijuana plant as just a commodity. Growing a marijuana plant isn’t a unique capability; those firms involved in tasks that are easily replicated will suffer from “commoditization” and a downward pressure on prices.
The marijuana retail dispensary market is attractive but it’s getting more competitive, as cannabis becomes a legal and routinely available product. Marijuana has gone from counter-culture to consumer culture. Running dispensaries isn’t that big a deal anymore, unless they’re vertically integrated along the marijuana supply chain.
The strongest companies will be those that are cobbling together integrated operations, from growing the plant, to producing a “value add,” to marketing it via dispensaries.
Other survivors will be biotech companies with sufficient capital and research talent to produce effective cannabis-based medicines. For conditions ranging from epilepsy to multiple sclerosis, to glaucoma, to even cancer, compounds derived from the plant are achieving remarkable results when conventional therapies can’t.
What other risks threaten the marijuana industry?
Increasing numbers of states are legalizing pot, but Uncle Sam still bans it at the federal level. The feds have left it to the states to come up with their own laws regarding pot, which has created a crazy quilt of regulations.
What’s more, the Trump administration remains avowedly anti-pot. A change in the regulatory climate could clobber marijuana companies. But I don’t see that happening.
The normalization of marijuana laws represents an unstoppable trend. States and localities are becoming addicted to the tax revenue from pot and Congress knows this fact of life. Most lawmakers don’t want to end the tax revenue gravy train.
Editor’s Note: As I just made clear, marijuana is no longer a touchstone of the culture wars — it’s now a multi-billion-dollar business. But what about specific marijuana stocks? Which ones should you buy?
My colleagues have put together a new report that delivers the tickers and the timing of the best marijuana plays. These stocks are poised to take off; the time to act is now. Don’t miss out on the green rush. Click here for full details.