Marijuana Industry: Big Money or Big Risk?

By Paul Gaita 11/10/14

Opinions vary as to whether investing in marijuana businesses is wise or not.

med weed bottle.jpg

Election Day wins for marijuana legalization initiatives in Alaska, Oregon, and Washington, D.C. appear to have stoked investor interest in the cannabis industry.

More than 200 high net worth investors converged in Las Vegas on November 11 to submit pitches to a forum by the ArcView Investor Network, which brings together legal cannabis-related businesses, and investors seeking to profit from this growing sector. But is now the right time to put funds into marijuana businesses?

According to a cross-section of media and investment observers, the answer is yes and no. Forbes contributor Mark Fidelman recently helped to conduct a survey of investors to BioTech to gauge their interest in the cannabis industry and found that nearly 75% of the respondents believe that it’s a financially sound idea. And while Fidelman is quick to point out the single biggest obstacle facing potential investors—that pot is only legal for sale by in-state companies, and remains a Schedule I substance—Fidelman and the investors he surveyed believe that it is only a matter of time before marijuana is made legal at the federal level.

Investors who get into the cannabis industry at this early stage may be poised to follow in the footsteps of Joseph Kennedy; as Chet Billingsley, CEO of Mentor Capital, Inc., explains, “He amassed a stock position before the lifting of prohibition and made a fortune from the re-legalization of alcohol. Many public companies are copying this model. They are positioning to have market share and established market presences when marijuana prohibition lifts.”

But Matt Egan at CNN’s Money desk takes a more bearish view of the pot market. Publicly-traded marijuana companies are fueled by penny stocks, which are less regulated and more speculative than large cap stocks maintained by major companies. He cites the example of Medbox, which makes automated dispensing systems for both medication and marijuana.

Rabid investor interest in December 2013 sent stocks up from $8 to $93.50 less than a month later. But within two days, the stock plunged back to $33, and remains around $11, which is not much further from where it began a year ago. Medbox is one of the bigger marijuana stocks, with a market value of around $350 million, yet remains a risk because the industry is so limited.

For investors waiting for federal legalization, Egan quotes Nicholas Colas, chief market strategist at ConvergeEx: “If you begin to get a feeling that marijuana will become legal in our lives at a federal level, you should probably look at tobacco companies, because they already have the manufacturing and distribution facilities.”

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Paul Gaita lives in Los Angeles. He has contributed to the Los Angeles Times, Variety, LA Weekly, and The Los Angeles Beat, among many other publications and websites.