Green is good. Or at least that’s what some investors are thinking.
Even before Colorado and Washington voted via plebiscite to legalize the recreational use of cannabis in 2012, there were indicators that the massive demand for marijuana was giving birth to America’s latest gold rush. Two years later, while police might still seize it, marijuana is rapidly sitting in both plant pots and portfolios.
What most Americans are probably not aware of is that these nascent signs of growth have now become a mainstream trade. There is a Marijuana Index (MJX) with comprehensive data behind all the key industry players. Bart Mackay became the country’s first “pot billionaire” when CannaVest became “the top performing stock in America.” CNN’s Sanjay Gupta’s documentaries helped elevate public discussion about the benefits (and costs) of both medical and recreational use.
The growth of the industry has certainly benefitted from public opinion shifts and significant political muscle. A recent WebMD also found that 67 percent of doctors stated that medical marijuana should be an “option for patients.” Late last year Gallup published a poll showing that for the first time ever a majority of Americans supported legalizing marijuana. This seismic cultural shift in America (it was 34 percent in 2004) has given investors hope in some kind of inevitability of history, that as these norms change so too will both the legal and regulatory environment. But other forces are also at play.
The late comedian Bill Hicks once quipped that America didn’t have a problem with drugs, just “those untaxed drugs.” His observation, while amusing, was also prescient. Certainly there are the costs of policing a drug that nearly 40 percent of Americans have admitted to taking, but for state governments it could also be extremely lucrative. Denver reaped $3.2 million in tax revenue for the month of February, an increase from the previous month. Some critics point out that these numbers fell short of expectations, but then again these are the same individuals who have endorsed a regulatory environment that has made licensing extremely cumbersome. Still these arguments have not been enough to put off other states from considering legalization. Even more are looking at reforming their medical marijuana laws.
As the political and cultural environment changes it is the hope of the marijuana ‘industry’ that supply becomes more secure and reliable through a legal overhaul. It’s certainly worth stating that not all ‘pot stocks’ are exactly that, with some strictly focused on the medical research industry and others occupied with providing consumer demand. But due to the confusing legal signals and guidance from the Obama administration (illegal to sell, but you must pay taxes from sales) there is still a great deal of uncertainty and risk. Just a slight shift towards reducing the stigma and providing clarity goes a long way. For example, the inclusion of limited hemp cultivation in the Farm Bill saw marijuana stocks surge.
The gold rush is most certainly on, but any investor still has to be extremely cautious and do extensive due diligence. The industry, like any boom trade, is awash with promises of lucrative returns from snake oil salesmen who can easily throw together a vacuous press release. The headlines on MJX and other sites regularly highlight industry legal battles while pundits come close to accusing companies of outright fraud. In fact the Securities & Exchange Commission recently suspended trading of one company for two weeks, citing “potentially manipulative transactions.” And these accusations pertain to industry leaders.
And yet the growth in green is still regarded as one of the best investments for 2014 (or even the next decade). Some industry leaders that have been bearing the brunt of increased scrutiny and extensive criticism are still up this year. However, the highs and lows that pundits speak of are not just easy puns. With legal threats and questions over transparency, trading has been defined by volatility. The industry at large is certainly here to stay. But like the dotcom boom it’s a question of not just joining the winners, but avoiding the likelihood of extensive casualties.
Disclaimer: I trade penny stocks as a hobby. I own stock in Cannabis Science, Inc. (CBIS), “a U.S. Company specializing in cannabis formulation-based drug development and related consulting.
Ewan Watt writes extensively on state and national issues in the US, covering the 2012 presidential election for both print and online publications. He writes strictly in a personal capacity. You can follow him on Twitter at @ewancwatt