High returns, higher risk: Tips on investing in marijuana stocks and start-ups, in U.S. and Canada
The rise of legal marijuana is a once-in-a-generation event that will bring many opportunities, but also many risks. Don't bet the house.
In the annals of investor euphoria, marijuana will likely mark a high point.
Mirroring last year's spike in crypto-currencies such as bitcoin, marijuana has emerged as 2018's hot investment topic, and promises to engage investors from Wall Street to Main Street after Canada legalizes cannabis for adult use on Oct. 17. The Wall Street Journal compared 2018's marijuana frenzy to 1997's craze over the Internet.
While expectations are prodigious, legal cannabis spending globally is expected to hit just $32 billion by 2022, concludes Arcview Group/BDS Analytics. So the entire worldwide legal market, by that estimate, may reach only the size of 3M or ConocoPhillips. Analysts with the Cowen Group forecast that legal marijuana will reap $75 billion by 2030.
With public companies' stocks gyrating up and down, "it's very important to do due diligence because revenues are more important than the number of press releases," said Arcview's John Downs.
For the high-net-worth crowd, opportunities include syndicates, private equity, and venture capital funds.
For mom-and-pop investors, the options may be riskier, given that retail investors can access the marijuana market mostly through volatile Canadian stocks such as Tilray, a Canadian marijuana producer that went public in July at $17 a share. Speculators drove Tilray up to $300 in mid-September before it slumped to $140 or so on Friday. Beware this overhyped weed stock.
Medical marijuana is now legal in 30 states. Pennsylvania, New Jersey, and Delaware are in the process of expanding their medical programs, and industry experts are gambling that full-adult recreational use could be legalized in the three states within five years. Nine states already have legalized adult-use cannabis.
Philly hospitals are joining the party, too. On Oct. 3, Thomas Jefferson University, home to the Lambert Center for the Study of Medicinal Cannabis and Hemp, is hosting a Shark Tank-like business pitch competition for medical marijuana products. Eight finalists, from more than 50 submissions, are vying for the Cannavation $10,000 top prize, which will also include business mentoring and legal support.
Plowing money into marijuana where it is grown and dispensed may be a challenge for even the best-connected investors.
Christina Visco, president of TerraVida Holistic Health Centers, runs three of Pennsylvania's busiest cannabis dispensaries in Abington, Malvern, and Sellersville.
Pennsylvania's state Department of Health will award permits for dozens more dispensaries before year's end.
Although patients are welcome, don't bother ringing Visco to ask for a piece of her business.
"I am fully funded. I can't take any money," she said. "It's funny, nobody wants to give you money when there's a risk, but when you're at the top of the heap, everyone wants to."
Pot opportunities knock
There are many chances to invest in businesses that don't touch the plant. Scotts Miracle-Gro (NYSE: SMG), the Ohio-based gardening company, has aggressively built a portfolio in hydroponic equipment. Analysts believe that the subsidiary, Hawthorne Gardening, could see big demand for Scotts Miracle-Gro if recreational marijuana becomes legal beyond nine adult-use states and home cultivation is allowed.
Companies that make packaging, specialized lighting, and robotics for small-scale agriculture may also be good bets. Thermo Fisher Scientific, with offices in Philadelphia, makes testing equipment and recently announced a collaboration with Vancouver's Supra THC Services.
"We desperately need a seed-to-sale software program that works," Visco said, referring to the computer software that tracks all marijuana sales and has been problem-plagued in Pennsylvania. "If you want to be richer than rich, put together an accurate software platform. Also, somebody needs to create a bank."
For folks with deep pockets and little time for research, investment networks offer a shortcut.
Arcview Group, based in Oakland, Calif., claims to be the nation's first cannabis-focused angel investing network. The group vets private companies looking to raise capital. Membership starts at $2,500 a year and is open only to accredited investors, with a net worth of $1 million or more.
Arcview stages events where investors can hear cannabis-related pitches, similar to those made to hedge funds and private equity concerns.
Lindy Snider, the Philadelphia-based cannabis entrepreneur and investor, calls Arcview "a fantastic opportunity" because it "recognizes that people want to dip their toe in, they don't want to commit too much. It provides opportunities for learning and networking. They've created a vehicle for small amounts of money ($10,000 to $50,000) and have investments in multiple companies."
Snider, who is launching a line of cannabis-infused skin creams for cancer patients, said Arcview's fees are comparable to those of other technology funds.
Emily Paxhia, founder of Poseidon Asset Management, a cannabis focused fund, said investors shouldn't put in money they can't lose.
"Look at the part of your portfolio that's dedicated to the higher risk. I wouldn't put savings into it, just like I wouldn't into crypto. Be cautious."
Ellie O. Siegel, a South Jersey-based lawyer and cannabis consultant, said Arcview and other investment clubs can provide valuable access. "You pay membership to see viable deals."
Siegel has an application in place in New Jersey for an integrated growing facility and dispensary in Atlantic City. If successful, she'll become CEO of Cresco Atlantic, whose sister company, Cresco Yeltrah, commands about 40 percent of Pennsylvania's medical marijuana market. Siegel's company was one of 146 applicants for six New Jersey licenses.
Cresco Atlantic also is fully funded and not accepting any more outside money.
"If someone had $50,000 and didn't have a friend already in cannabis, the best they could do is on the public markets," Siegel said.
Canadian stocks, eh?
Many U.S cannabis firms are rushing to go public before year's end. And they will likely list on the Canadian exchanges because cannabis remains illegal under U.S. federal law.
Acreage Holdings, a multi-state operator that counts former U.S. House Speaker John Boehner as an adviser, announced Sept. 21 that it was pursuing a reverse takeover (RTO) with a shell company called Applied Inventions Management, formerly a swimming pool alarm company. If approved, the transaction will allow Acreage to go public in November. The company operates a grow house in Pennsylvania. (Acreage is an investment by Chase Lenfest, son of the late Philadelphia philanthropist H.F. "Gerry" Lenfest.)
Two other Pennsylvania operators, Vireo Health and Green Thumb Industries (OTC: GTBIF), are also about to debut on Canadian exchanges.
More firms are thought to be pursuing similar strategies.
MTech Aquisition Co. (NASDAQ: MTECHU), founded by a trio of hedge fund veterans, recently raised $50 million as it examines potential mergers with U.S.-based cannabis tech companies. A special-purpose acquisition company, MTech exists only to take a private company public.
"We're looking at supply chain management, hydroponics, and things like that," said Tahira Rehmatullah, MTech's chief financial officer. "We're also vetting large seed-to-sale trackers, delivery and analytics providers, and software platforms."
Other cannabis-associated stocks on U.S. exchanges include GW Pharmaceuticals (NASDAQ: GWPH), which was given FDA approval to produce and sell Epidiolex, a marijuana-derived treatment for severe forms of childhood epilepsy. The drug went through clinical trials in part at Children's Hospital of Philadelphia.
Constellation Brands — brewers of Corona, distillers of Svedka vodka, and vintners of Mondavi Wines — has poured billions into Canopy Growth, a marijuana producer. After a $4 billion buy last month, Constellation (NASDAQ: STZ) now owns 38 percent of Canopy.
Every grow operation and dispensary needs a building. So two real-estate investment trusts promise some exposure: Innovative Industrial Properties (NYSE: IIPR) is a REIT focused on properties for the medical-use cannabis industry. Inception REIT (I-REIT) is raising money as a private real estate investment trust and capital provider in the cannabis industry.
There are roughly a half-dozen exchange-traded funds in the marijuana and cannabis space, including the first mover in the U.S., ETFMG Alternative Harvest ETF (MJ). But the fund's price and its underlying holdings haven't been moving in sync lately, the Wall Street Journal reported, drawing the attention of regulators.
The AdvisorShares Vice ETF (ACT) holds 20 percent pot stocks, and the rest in other "vice" holdings such as alcohol and tobacco companies. Other ETFs trade only on Canadian exchanges, and access to retail investors may be limited depending on your broker, but include Horizons Marijuana Life Sciences Index ETF (HMLSF), Evolve Marijuana ETF (SEED), and the actively managed Marijuana Opportunities Fund (MJJ). Another U.S.-listed fund is in registration, with the symbol TOKE.
"Investing in these is completely speculative, and shouldn't be money you use for retirement savings," said Bloomberg analyst Eric Balchunas. "But if you see it as the end of Prohibition Part Two, then there's a strong case for owning these."
Use extreme caution when investing in small-cap companies that trade infrequently, "because they're not required to have the same financial disclosures," said Arcview's Downs.
"Even though they have a public listing in Canada, that doesn't mean they have revenue. There's no guarantee. You'll see evaluations more aggressive than in other industries because of the hype. There are significant opportunities, and there will be winners. It's a once-in-a-generation event as it migrates from the illicit to the legal markets."