A special note from Edelson Institute Executive Director Mike Burnick: Sean Brodrick has a knack for discovering small resource plays with massive upside potential. But the next gold rush may not be in metals at all but, rather, marijuana. Sean’s latest research suggests that you might want to start seriously thinking about investing in this $50B industry soon. See if you agree …
States around the country are sounding the starting gun on a new gold rush for investors. Not in metals. In marijuana.
In November, four more U.S. states voted to legalize recreational marijuana. Those were Maine, Nevada, Massachusetts and the biggie, California.
That makes eight U.S. states, plus D.C., where marijuana is legal. Add those to 28 states that allow medical marijuana. And even more are exploring some form of legalization or decriminalization
All this is putting the “biz” in cannabis. So how much is it worth?
Today, only about $6 billion in legal sales. But like any weed, those sales are going to grow quickly.
Analysts at Cowen & Co. estimate that there is another $25 billion in black-market pot sales. Those could add to the legal side of the ledger very quickly. All told, Cowen thinks the cannabis industry could be worth $50 billion by 2026.
What does that mean for individual states? Well, Colorado is helping lead the way on legal pot. It saw $1.3 billion in legal marijuana sales last year. That generated $200 million in tax revenue.
That was last year. This year, Colorado’s combined sales of medical and recreational marijuana totaled over $235 million in January and February. That’s up 30% from the same period last year.
This is happening even though marijuana prices are going down, thanks to free-market competition.
Canada is on the path to full legalization. Full legality means that companies will be able to operate without fear of federal interference or confiscation.
Indeed, it takes effect July 1, 2018.
That means banks and credit cards will work with Canada-based marijuana companies.
It also means that a crusading attorney general won’t be chasing after entrepreneurs who just want to make money.
And that means we could be at a tipping point for investors.
Investing in Marijuana
After a rip-roaring 2016, widely owned marijuana stocks stumbled in 2017.
Only three of 21 companies in Bloomberg’s global cannabis index have positive earnings. And they’re all medical marijuana companies. But that should change in the future, as recreational marijuana comes into its own.
Just remember, this is a market in flux. For example, on average in 2016, a pound of marijuana went for $2,500. Now, the price has dropped to $1,000. The more prices drop, the more growers and dispensaries get squeezed.
So what should investors look for?
I spoke with Scott Greiper, the president of Viridian Capital. It’s an investment banking firm with a focus on cannabis. Along with raising capital for cannabis companies and doing M&A, Viridian acts as strategic advisers to the CEOs and boards of budding marijuana companies.
We spoke by phone, but Mr. Greiper and I will meet at the Southeast Cannabis Conference & Expo in Ft. Lauderdale on June 9.
Greiper says most people might be surprised by the level of professionalism in the room.
“There’s been a change since early 2014,” he says. “There’s a clear and accelerating trend of more entrepreneurs coming in, more professional CEOs, and more professionalism in the investors.
“Bloomberg calls this the fastest-growing market in the world.”
Greiper’s most important advice to any investor new to the marijuana space is to understand the management.
“A lot of operators of cannabis teams don’t have a track record of building and selling businesses,” he says.
“They’ve been growing, but they don’t have business acumen. This is the biggest risk for investors.”
He says the first thing he does is check that the management team had previous success in growing a business.
“I look for a CEO who does not come from the marijuana business,” he says. “Instead, they’ve pivoted in.”
Greiper went on to say he avoids companies that are relying on high marijuana prices. “This is a commodity crop, just like wheat or corn,” he said. “I look for business models that can work with a declining wholesale price.”
Greiper pointed out the importance of determining your level of risk tolerance.
“There is a line of demarcation in cannabis companies,” he says. “Those that touch the plant and those that don’t.
“Ancillary providers have a lower risk profile. They are providing software, security, or own the land the cannabis grower sits on.”
He added that California’s legalization was really important. The timeline for the state to start issuing licenses to those eventual pot shops is Jan. 1, 2018. “It’s the largest single cannabis market in the world. California is truly the epicenter of the industry.”
He went on to say that legalization in the rich population centers of Massachusetts and Florida are important milestones, too.
The Gold Standard
I asked Greiper about Canada. He said investment money is surging into the cannabis industry there.
“Canada is the gold standard right now. It is a federally legal medicinal marketplace. Next year, it becomes a federally recreational market.”
As a result, Canada doesn’t have the “haziness” of the U.S. market, he adds.
We’ve seen U.S.-listed cannabis stocks generally drop in price since the beginning of the year. Greiper believes a lot of them got overbought. “But if you do your homework, you can find strong management teams.”
I look forward to getting more insight from Greiper at the conference in Ft. Lauderdale.
Bottom line: If you’re careful … and if you are selective in your choices businesswise and geographically … I think investors in this field could make fortunes.
All the best,
P.S. The New York Times calls legal marijuana “The Next Gold Rush.” And Shark Tank’s Kevin O’Leary says, “This is like the end of prohibition. It’s going to be a remarkable opportunity. The cashflow in Colorado is THREE TIMES what they thought it was going to be.” See why the next gold rush is likely to be green instead.