You've seen the almost-obscene projections for cannabis sales in the next five years, and you want a piece of the action. Ackrell Capital posits that the combined legal medicinal and recreational cannabis industry could hit 23 billion by the year 2020—so many zeroes! Before you jump headfirst into the Green Rush, you'll want to do some research first.
In terms of marijuana stocks, since the cannabis industry is fairly nascent, most companies are too small to trade on a federal exchange such as the New York Stock Exchange (NYSE). One exception is GW Pharmaceuticals, a British company that trades on the Nasdaq, and which has made headlines with its FDA fast-track strategy to bring an oil-based CBD formula to market in the U.S.
While we're seeing some promising gains with cannabrands achieving success across state lines such as Dixie Elixirs, the bulk of cannabis companies are small and have not attracted the enterprise-level talent that we see in the tech industry, for example. At this stage in the game, most cannabusinesses are a passion play by those individuals with a enough moxie to go against the grain and put their reputation on the line. While these activist entrepreneurs believe deeply in the cause of this movement, that lightning bolt of determination doesn't guarantee a win or the business acumen that it takes to overcome the numerous obstacles that currently exist for ganjapreneurs.
One of the highest hurdles that cannabusineses encounter is federal tax code. Due to federal illegality, cannabusinesses cannot write off operating expenses or marketing expenses. This is a huge burden on revenue and a strong reason to consider investing your hard-earned money elsewhere if you intend to see a return on your investment anytime soon.
If you are still on board, then consider pink sheets. Pink sheets, also referred to as penny stocks, are where most cannabis securities are trade—over-the-counter (OTC) or outside the federal exchanges. This means that regulation is not quite as stringent, and it also means that the due diligence falls even more so on your shoulders. You'll need to dig deep and know that it will be time consuming.
MERRY JANE spoke with Evan Eneman of Casa Verde Capital, a venture capital firm based in Los Angeles. Casa Verde invests in companies that operate ancillary businesses within the cannabis industry. Here are five expert takeaways and general rules of thumb that could help you keep your shirt in the Green Rush:
1. Proceed with extreme caution. Beware of potential scams and be skeptical when evaluating business models.
2. Consider companies that operate in other legal market segments. For example, Heliospectra is a successful overseas agri-tech lighting company traded OTC in the U.S., but you'll want to look deeper. Are you investing in the parent company or a segment of the operation? How does that impact your risk profile and investment outlook?
3. Consult brokerage experts and various advisory media portals such as Motley Fool as an additional layer to your own investigation. You may find that information on the company is not easy to find. Don't believe everything that you read in a press release or in company-sponsored content.
4. Know that the industry is still developing in conjunction with regulations. We can expect a deviation in the market between recreational and pharmaceutical grade medicinal product—keep that in mind when evaluating potential investment. Note that alternative investment vehicles may be better for your approach.
5. Look at the executive team. Where do they come from? What are their credentials? Do they have the chops to weather the storm and see it through to the end of prohibition? Will the members of the executive team be able to execute business objectives within the existing state regulatory environment and the ever-changing landscape? Does the business operate under strong governance with robust internal controls?
Investment opportunities are becoming more readily accessible to the masses with the advent of crowdfunding and no-fee smartphone trading apps such as Robinhood. We still need to be wary of where we put our money and to be sure it's an ethical recipient worthy of our consideration (or worse, proliferation). The best advice is to be mindful of the oldest rules in the book: Diversify your portfolio and hedge your bets where possible. Good luck out there and may the best, most benevolent companies win.