Pot Investment Opportunities Rise As Acceptance Grows

Sales from legalized marijuana are expected to grow at an annual rate of 29% over the next four years, providing an appealing investment opportunity. But industry insiders caution that stocks in the new industry are a risky investment. 

"These are very risky stocks and not all of them are going to survive," Dan Nicholls, vice president of the Marijuana Index, a benchmark that tracks marijuana stocks in the U.S. and Canada, told CNBC.

Most publicly traded marijuana companies are unregulated. In 2014, the Securities and Exchange Commission (SEC) suspended five marijuana companies for fraud. That prompted the SEC to put out an investor alert about cannabis stocks. 

"Fraudsters often exploit the latest innovation, technology, product or growth industry—in this case, marijuana—to lure investors with the promise of high returns," the statement said. 

Despite the concern, the marijuana industry is expected to boom in the coming years. Twenty-five states and Washington, D.C. have approved some form of medical marijuana access, and four states and D.C. have legalized recreational use.

In November, five more states will vote whether to legalize for recreational use, and four (Arkansas, Florida, Montana and North Dakota) will vote on medical marijuana. In all the states that are voting, legalization is ahead in the polls. That includes California, the sixth largest economy in the world.

Currently, legal marijuana sales bring in $7.4 billion annually around the country. With expected passage of legalization in California, Massachusetts, Maine, Arizona and Nevada this Election Day, the legal cannabis industry is expected to be worth $20.6 billion by 2020, according to New Frontier Data. 

The Marijuana Index began in January 2015. Although it is the most rigorous index, it covers only a small amount of marijuana stocks, since most companies are still traded over-the-counter, outside exchanges. 

Despite only having 23 stocks, the Marijuana Index shows both the promise and risk of cannabis stocks. The index has risen more than 180% this year, after plunging 57.2% in 2015. 

People who are interested in investing in marijuana companies should take stock in a variety of businesses, says Nicholls. Regulatory changes and increasing competition make it particularly hard to predict which marijuana companies will succeed. "It's really hard to say right now how much these companies will be worth,” Nicholls said. 

Marijuana legalization is also affecting stocks in traditional markets. Businesses that supply the marijuana industry—including lawn care products—have seen a bump in stock prices. Scotts Miracle-Gro has seen a 32.7% increase in stock prices this year. 

"The hydroponics market taps into marijuana demand and the company now has a growth option that we think an investor is able to capture for about the price of the traditional business," wrote JPMorgan Chase analyst Jeffrey Zekauskas about Scotts Miracle-Gro in an Aug. 4 note to clients.