With marijuana legalization slowly spreading across the country, we are beginning to see a lot of advertising promoting investing in marijuana industry related stocks. We question the integrity of many of these promoters. At this time, we recommend avoiding these issues for the following reasons.
First, many of these companies are in the start-up phase. They have very little in the way of revenue, and most are not profitable. We believe that it is too early in the business cycle to consider putting capital at risk in these types of companies.
Second, many of the legalization statutes enacted, Maine’s included, have provisions that all but exclude large corporations from participating in this market. This is most likely detrimental to the growth of the industry. While the rules may be good for local businesses, “staying small” has never been a good strategy in terms of properly developing an investment- worthy market sector. We believe that, once the major companies (read Altria Group, British American Tobacco, etc.) begin to develop brands around marijuana much like they did with e-cigarettes and vaping, it will be time to consider investing in the sector if one chooses to support that sector.
An argument can be made that one would want to be in the sector before the large corporations get in. In this case, with all of the variables surrounding the implementation (and legislative delays thereof) of the marijuana legalization statutes, we do not believe the argument to be valid.
Finally, and perhaps the biggest reason we recommend avoiding these issues, is that marijuana is still classified as a Schedule 1 drug at the Federal level. There has been no assurance from the Federal government that they will continue to tolerate state laws concerning both medical and recreational marijuana. The risk of the Federal government stepping in and enforcing the drug laws has the potential to destroy the semi-legitimate portions of this industry, almost overnight. Again, this poses what we believe to be an unacceptable level of risk on these investments. In this case, as in many cases in the investment world, this risk is best avoided.