Great Article from David Pett of the Financial Post.
Reefer madness is back. But this time it’s not high school delinquents going crazy, but equity investors hell bent on marijuana-related stocks.
Shares in companies catering to the multi-billion-dollar pot industry have soared this year due to legislative changes south of the border that vastly reduce legal restrictions on smoking pot for medical and recreational purposes.
Many believe we’re only at the beginning of a far bigger play that could rival the dotcom boom and bust of the 1990s. If so, more and more investors will be keen on getting in on the fun, all the while hoping they don’t get burned.
The marijuana play gets its spark from significant changes to longstanding laws that govern the use, sale and possession of cannabis in several countries around the world, including, most importantly, the United States, where a number of states have decriminalized the substance to varying degrees and/or created exemptions specifically for medical cannabis over the past few years.
Colorado and Washington have gone so far to legalize the recreational use of cannabis for adults following the approval of state referendums in 2012, but a similar ballot measure in Oregon failed. In Canada, interest in the cannabis industry has been budding in anticipation of Health Canada’s move to allow licenced commercial growing of medical marijuana as of April 1.
“If you’re lucky enough to make a profit, make sure to take it. Bogarting that stock can be costly”
It’s not easy to pin down exactly how big the global marijuana market is or might be given the shifting legal landscape and its still largely underground nature. But ArcView Market Research pegs the U.S. market for legal marijuana at a current value of US$1.4-billion and projects it will grow to US$2.3-billion in 2014 and US$10.2-billion in five years.
Other estimates south of the border suggest overall sales of cannabis are worth a lot more, perhaps topping US$120-billion a year, putting it on par with the alcohol or tobacco industries, which generated combined revenues of US$263-billion in 2008, according to a Standard & Poors report. In Canada, the medical marijuana market, alone, could be worth more than $1-billion by 2024.
Of course, many of the estimates for pot sales hinge on future demand, both medically and recreationally, which has stabilized in a number of countries over the past decade. The United Nations Office on Drugs and Crime estimated that between 2.8% and 4.5% of the world’s population aged 15-64 in 2009 had used cannabis at least once in the past year. Put another way, that’s between 125 and 203 million tokers.
There are now dozens of marijuana stocks listed on global equity markets and many more are on the way including Tweed Inc., a Smith Falls, Ont.-based grower and harvester of medical marijuana, which will become the first cannabis-related listing on the TSX Venture Exchange when its announced reverse takeover of LW Capital Pool Inc. is completed.
The biggest selection of stocks in the space by far is found on over-the-counter U.S. markets. Most of these names are penny stocks with market capitalizations well under $100-million, but a few exceptions exist. For example, shares in GW Pharmaceuticals PLC, a British biotechnology firm that makes pain drugs using cannabinoids (a group of compounds present in cannabis), trade on the Nasdaq and the company has a current market value close to US$850-billion.
Share returns for many marijuana stocks have been absolutely eye-popping so far this year.
For example, Hemp Inc., a manufacturer of hemp-based consumer products, in January climbed 1,400%, which included a 225% gain during a three-day stretch at the end of the month. Advanced Cannabis Solutions Inc., which leases growing space and related facilities to licenced marijuana growers and dispensary owners for their operations, jumped 1,300% over the first two months of this year. And electronic cigarette maker mCig Inc. was up 900% year to date through Mar. 18.
Lately, these names and others have fallen on harder times, highlighting the risk and volatility inherent in the play.
The Marijuana Index, which tracks the performance of 36 cannabis-related names in the U.S., has a 52-week low of about 0.66 and a 52-week high of nearly 69.8, representing a top-to-bottom gain of roughly 10,500%, but in the last month it has plummeted 72% to 19.46.
Let’s be blunt: This is a highly speculative trade that will result in huge losses for careless and uninformed investors. Many of the companies in the space won’t make it as going concerns and shares in those that do are expected to trade sporadically on news about the industry and their earnings prospects come to light.
But the potential risks don’t stop there. In January, the Financial Industry Regulatory Authority (FINRA) reissued an alert specifically cautioning investors about marijuana stock scams.
FINRA particularly warned about pump-and-dump ploys, noting one company that promoted its move into the medical cannabis space by issuing more than 30 press releases during the first half of 2013. These releases publicized rosy financial prospects and the growth potential of the medical marijuana market, FINRA said, but the company’s balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan.
For those investors who do want to play the space, it’s recommended to keep allocations tiny — say, less than 5% of your overall investment portfolio — and to spread the risk across several different names. And if you’re lucky enough to make a profit, make sure to take it. Bogarting that stock can be costly.