Marijuana Stocks: The New Gold Rush?

A couple of years ago, I wrote an article about Socially and Environmentally Responsible Investing. Today, I am writing about a different type of “green” investing—marijuana stocks. Some people would never invest in marijuana stocks as a matter of principle. However, putting ethical considerations aside, does this “growth” industry make sense from an investment perspective?

Acceptance of Marijuana Grows:

An annual Gallup poll shows that marijuana’s popularity is growing like a weed: Only 12% of the population thought legalizing marijuana was a good idea in 1969; favorability grew to 25% by 1995, and it currently stands at 64%. Many states have legalized marijuana over the past few years, including twenty-nine states for medical purposes and eight states for recreational purposes. It is also legal in all of Canada for medical purposes and is expected to be legalized for recreational purposes by July 2018. Marijuana is only used by a small percentage of retirees, but the numbers are growing because pot has been shown to relieve pain and help with a number of medical ailments such as arthritis.

What Is the Investment Case for Marijuana Stocks?

Many articles have promoted investing in marijuana stocks, so I occasionally get questions from clients. The investment case is tempting at first glance, when you consider these stats:

  • Legalized marijuana is still in its infancy. The market is expected to grow by 20-30% per year for the next 5-10 years.
  • Marijuana is already a $17 billion industry in the United States and the second largest cash crop, behind corn ($40 billion).
  • The Bureau of Labor Statistics forecasts that the marijuana industry will create 250,000 jobs over the next 4 years, while other major industries are losing jobs (e.g., retail and manufacturing).

Investors Can Get Burned by Marijuana Stocks:

Dreams of becoming a marijuana millionaire can easily go up in smoke for any of the following reasons:

  • Most of the companies are small (i.e., micro-caps and penny stocks), not yet profitable, and highly speculative.
  • The product is still illegal at the federal level and, therefore, cannot be transported across state lines.
  • As of last year (2016), only 301 of the nation’s 12,000 banks and credit unions were willing to work with marijuana companies, and it is estimated that 70% of weed-based businesses do not have bank accounts.
  • Insurance companies will not insure the plants, which can cause huge losses. (Anyone hear about California wildfires?)
  • IRS rule 280E prohibits companies that profit from Schedule 1 drugs (i.e., marijuana) from writing off operating expenses like rent or wages. That means a marijuana company is effectively taxed on sales. This is a big disadvantage compared with every other business.

The Bottom Line on Investing in Marijuana Stocks:

There will certainly be some marijuana millionaires and possibly billionaires. That being said, most of the companies are likely to fail. This happens in all new industries. The solar industry is a perfect example. Solar has a bright future, but many companies have gone bankrupt, and most solar stocks have been terrible investments.

We do not have any plans to speculate on marijuana stocks in client accounts, but if any readers are tempted, here are a couple of thoughts to consider:

  • Speculative investments like marijuana stocks should be a small percentage of anyone’s portfolio. Like we always say, “Not enough to make a killing and not enough to get killed.” Translation? 2-5%.
  • Don’t play the fool’s game of investing in penny stocks. It is tempting to think you can make 400% when your 25-cent stock goes to a dollar. The reality is your 25-cent stock is more likely to go to zero. So look for larger companies trading above $5 per share, with substantial liquidity (trading volume).
  • Seems every investor’s research led to the same large Canadian Cannibis companies. As a result, their share prices are already very expensive.
  • When doing your research, consider my gold rush analogy: Most gold miners ended up broke. The people who made the money were selling shovels.

Have a great week.