Things have started to turn around for the cannabis market since the 2014 pot bubble, but it can still be difficult for investors to know how to find the best cannabis stocks to invest in.
For starters, marijuana isn’t yet legal for recreational use in Canada and in many states across the US. Furthermore, a number of states and provinces are looking at legalization for both medical and recreational marijuana use, making it difficult to keep track of what licensing requirements to look for when doing one’s due diligence.
To help investors and market watchers find the best cannabis stocks to invest in, former Wall Street attorney Chris Milenkevich started Gotham Cannabis Associates, a firm that specializes in due diligence on publicly traded cannabis companies. After 11 years as an attorney with Cadwalader, Wickersham & Taft LLP, Milenkevich started looking at whether he might be able to apply his skills in a different environment, and the cannabis industry looked like the place to be.
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“The cannabis industry is obviously a very new industry and one that was very exciting,” he said. “It’s very rare that you have a brand new industry arise.”
However, he also noted that the cannabis industry is currently characterized by a lack of information, despite there being no shortage of people looking to get involved in the space. “I really realized there was just such a need for quality, sophisticated diligence of the kind that I was used to doing for so many years Wall Street,” he said.
Certainly, Milenkevich has a stronger grasp of the legal landscape in relation to cannabis than most, making his insight extremely helpful when conducting due diligence on cannabis companies. The Investing News Network spoke with him about what investors should keep an eye out for when looking for the best cannabis stocks to invest in.
Legal considerations: Can the best cannabis stocks to invest in cross state lines?
As mentioned above, cannabis is legal in 24 states in the US, but it is not legal at the federal level. That can lead to some complicated legal issues.
For example, Milenkevich pointed out that cannabis companies cannot use water from a federal aquifer. “If they’re drawing water to use in their cultivation, or to use in their extracting processes, and the water they’re using comes from a federally owned aquifer, they could actually get into a lot of trouble,” he explained.
“There are cannabis companies out there who have realized this is an issue, and they now have to contract private supply water companies to make sure they don’t run into a ton of mess.”
Another, perhaps more interesting point, is that cannabis companies cannot file for federal bankruptcy protection, which Milenkevich says is something that most investors don’t realize at all. “Bankruptcy in the United States is largely a matter of federal jurisdiction and bankruptcy court has rejected cases filed by cannabis companies,” he stated.
Finally, though you might find one of the best cannabis stocks to invest in in Washington, Oregon or Colorado, it’s worth keeping in mind that those companies cannot cross state lines. That makes it difficult to scale and grow a company effectively.
“People get very excited the idea of building a nationwide empire, forgetting that you can’t manufacture a cannabis product in one state and start selling it in another state,” Milenkevich said. For example, a growing cannabis company couldn’t simply expand its operations in Oregon and ship product to Washington.