At Yerba, our team gets a lot of questions about the cannabis industry. One of the most amusing requests is for “insider information” on stocks. Which ones are going to blow up, which ones will fizzle out, which ones have virtually no risk, and so on. So, in a general response to this line of inquiries, we have come to a conclusion on what our advice is for people thinking about purchasing stake in a company: don’t do it, yet.
From an investor standpoint, cannabis is a perfect marriage between unbridled financial potential and ultimate legal risk. For the past several years, headlines pop up on our news feeds announcing some new partnership or investment round that is going to “revolutionize the cannabis industry.” While cannabis businesses are certainly experiencing a “Green Rush” of sorts, it is still way too early for traditional micro-investors to enter the game.
The cannabis industry is in its earliest stages. While the cannabis economy has flourished as an illicit (or semi-illicit) market for decades, the opportunities for compliant business operations are drawing scores of major investors into a space ripe for potential. In traditional investment, wherever the big fish go, the small fish will surely follow. But for cannabis, an industry operating under a cloud of Federal illegality, traditional investment rules do not yet apply. An investment into an official round of funding for a cannabis business is not nearly as risky as buying into a company that has already made attempts at going public.
There are a few reason why purchasing stocks in these companies is risky, the greatest among them being that cannabis is not yet a stabilized commodity. In fact, it is quite the opposite. The United States of America currently hosts a patchwork quilt of varying state laws that dictate unique pricing for each state.
With the first handful of states supporting recreational sales, the nation watched as the market balanced heavy retail taxes, fluctuations in supply and demand, and diversion of legally-grown cannabis into illegal markets. And now that California, the world’s unofficially largest cannabis cultivation state, has passed laws for a recreational industry, you can expect the supply of legal cannabis to skyrocket.
Demand will also go up, but this tricky balancing act will keep the cannabis industry in a state of flux for the next several years, perhaps even decades. This means that cannabis stocks will also be subject to uncertainty and shifts in laws, and that is inherently what makes a stock risky.
Without naming names (since the advice here is to be patient and hold off purchases of cannabis stocks), let’s examine some of the issues currently plaguing cannabis businesses that have opened themselves up to public investment.
Earlier this year, a social media “giant” in the cannabis space (self-proclaimed) tried to file an S-1 Form to announce their plans to register with the Securities and Exchange Commission. They were completely denied due to a horrendous attempt at completing the form, and ended up settling for the penny stock exchange. Based on insight from financial compliance experts, this company is in a lot of trouble based on their attempted filing, with more than 100 percent of the company having been allotted to investors.
Several Canadian companies, all centered around cultivation, appear to be doing quite nicely when it comes to their stock value, and are even able to report revenue profits. The risk? With America rapidly shifting to a legalized cannabis market, the big players of late 2016 are likely to drastically tumble in the amount of market share they control. Watch out for heavily-hyped stock symbols to take a dive as more players enter the game.
There are countless of other examples in which cannabis companies rushed to the starting line without fully anticipating the struggles of finding success in a fledgling industry. Inevitably, some of these will turn out to be successful stocks, but the excited rush around marijuana stocks should be ignored by common investors for the time being.
Eventually, as cannabis prices stabilize, and foundational businesses emerge from the overhyped pool of “revolutionary companies,” cannabis stocks will prove lucrative. Until that time, patience outweighs the risk of investing in the Wild West of Weed.
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