Marijuana stocks have been getting a lot of media attention lately and their valuations have followed in lock step. So, the question becomes should you consider allocating funds to ride the wave or watch from the shore?
Let’s start off by looking at some of the progress that has been made towards recreational legalization in the US and abroad, a brief introduction to regulations, and examine some of the biggest names in the space.
States and Sentiment
As it stands today the US currently has 9 states and the District of Columbia have approved marijuana for recreation and medical use. Those are as follows: Colorado, California, Alaska, Nevada, Oregon, Washington, Vermont, Massachusetts and Maine. It is also on the November ballot in Michigan and North Dakota for recreational use and on the ballot in Utah and Missouri for medical use. There are another 22 (31 in total including the 9 aforementioned) that have allowed for its medical use. A recent study by Pew Research Center concluded a little over 6 in 10 Americans (62%) support Marijuana legalization, drastically up since 2000 when only 3 in 10 (31%) supported its legalization. The movement is being led by younger generations with millennials (74%) at the forefront supporting legalization, followed by Gen Xers (63%) and Baby boomers (54%).
Regulations
Individuals also must be over the age of 21 to possess or consume the drug. Cannabis is currently illegal to consume in public, even in all the states that have legalized it for recreational and medicinal use. This can get quite tricky with the exact definition of “Public”, but People V. Carlton helped provide more clarity. In the case, it was ruled that while your car may be privately owned, if it is parked in a public place it is illegal to smoke in it. This means that it must be consumed in a private residence at the moment or, some states have retail stores or clubs where it is currently legal for consumption. The amount that you can have in possession varies by state and ranges from 1 to 8 ounces. In states that have legalized medical marijuana, you need to be approved by a licensed physician and have a serious condition such as Parkinson’s, epilepsy or seizures to qualify (a full list of serious conditions by state can be found here).
Biggest Names
Some of the biggest names are Tilray (Tii:TLRY) and Canopy Growth (Tii:CGC), there are others but for the sake of this article, I will only focus on these two. . Tilray focuses on becoming a global leader in medical cannabis research and already has exposure in various overseas countries such as the UK, Czech Republic, South Africa, Australia and others. Canopy Growth’s claim to fame is that Constellation Brands (Tii:STZ) announced that it will invest an additional $3.8 billion dollars into the company after their initial $191 million investment last year. If they choose to exercise their warrants they could own 38% of the company. Even Coca-Cola (Tii:KO) has hinted that it is closely watching the nascent cannabis industry and is considering options to expand its footprint. Other beverage companies that have had talks with cannabis producers are Diageo (Tii:DEO) and Molson Coors (Tii:TAP). It is important to note, however, that these talks are mostly preliminary and there is a high probability that companies will not pursue acquisitions until it is legalized on a federal scale.
The explosive growth that this sector has experienced can be tempting, but performance chasing can be dangerous. The fear of missing out lives deep within us all (as much as we’d hate to admit it). While riding the wave can be fun, getting pulled down by the undertow is not. The industry is at best a speculative investment and at worst irrational exuberance. That being said, if you’re still interested in the space consider investing a very small portion (1-2%) of your portfolio and taking a shot on a few stocks that you have done your due diligence on. Dollar cost average over a year or so to prevent yourself from trying to time the market. Winners and losers will surely emerge in the future so the larger the net you are able to cast across the industry, the better your chances are at possibly landing a unicorn that can go 100x.