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.
Would legalization at the federal level be a game changer?
Certainly, there are plenty of challenges due to the fact that cannabis use hasn’t yet been legalized at the federal level. However, Milenkevich was hesitant that federal cannabis legalization would solve all of the industry’s problems.
“If it was legalized on the federal level it would certainly make life a lot easier for cannabis companies and therefore for investors,” he said, “but it’s not a panacea. There are still tons of state restrictions, and regulations vary greatly from state to state.”
For example, advertising rules for cannabis companies differ from state to state, making it difficult to launch a nationwide advertising campaign. Lifting the federal prohibition on marijuana wouldn’t change restrictions at the state and local level.
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Will federal legalization ever happen?
For his part, Milenkevich believes that federal cannabis legalization will happen eventually, but that it won’t be anytime soon.
“I think it’s ultimately an inevitability, but there are a lot of people who are acting like it’s going to happen at the end of this year,” he said, “ and I don’t think there is enough [to back that up].There are still a lot of people who are wary of the products and wary of the social implications.”
For example, he noted that legalization efforts in New England have been hitting obstacles to cannabis legalization due to concerns over an opioid epidemic currently taking place. Overall, he thinks that legalization will happen within the next ten years, but he wouldn’t be confident capping that prediction at five years.
That being said, the outcome of the US federal election could lead to changes in the cannabis industry. The New York Times noted that California, together with four other states, may vote in favor of recreational cannabis.
If California, in particular, voted yes–which has a sizable economy–it would be hugely influential in the federal legalization of cannabis.
What should US cannabis investors look for?
For now, investors looking for the best cannabis stocks to invest in will have to conduct their due diligence carefully. Here are a few things Milenkevich says investors should look for:
- Licensing; “You need to make sure that the company has every license that it needs, from every jurisdiction that it needs, and that could be state, county and local,” he said. Just because a company has a state license, doesn’t necessarily mean it’s up to snuff for a specific county, and investors should pay attention.
- Staying in line; Milenkevich stated that there are over 600 pages of regulations in Colorado alone. “They cover everything, from literally, what kind of font you can use on your packaging to whether or not the car that you are using to transport your products must be registered in Colorado or not,” he said. The best cannabis stocks to invest in will be aware of and compliant with all relevant regulations.
- Cash considerations; It’s sometimes said that cash is king, but for US cannabis companies, cash is a whole different issue. “Another result of the federal prohibition is that there are very, very few banks that are willing to work with the cannabis industry or credit card companies, because there’s a very real [risk] that they will be shut out of the federal banking system, if the federal government finds that they are … processing money for illegal operations,” he said. “A lot of cannabis companies are dealing entirely with cash. So, if you’re an investor, you need to think about how that is working, how is the cannabis company dealing with these, literally, bags of money.”
- Community relationships; Finally, Milenkevich stressed that it’s essential for cannabis companies to have a good relationship with their local communities, both in terms of corporate citizenship, and for liability reasons. “If you don’t have a good relationship with local authorities, they’re going to be looking for reasons to shut you down,” he said. “And when there are 600 pages of regulations, it’s not that hard to find a reason, no matter how careful you are.”
That’s a lot to consider, and some of that information may be difficult to come by. However, Milenkevich stated that by finding people who know the company, asking the right questions and making sure to get accurate industry intelligence, cannabis investors will be well on their way to finding the best cannabis stocks to invest in.
Cannabis companies
Milenkevich couldn’t mention any cannabis companies that Gotham has done due diligence on thus far for confidentiality reasons.
However, there’s no shortage of cannabis companies out there for interested investors to start looking in to. For a start, here are a few examples of cannabis companies that Alan Brochstein mentioned he’s keeping an eye on in a recent interview:
- Indoor Harvest (OTCMKTS:INQD)
- MassRoots (OTCMKTS:MSRT)
- Medicine Man Technologies (OTCBB:MDCL)
And for those north of the border, there are plenty of Canadian cannabis stocks to check out as well, such as:
- Canopy Growth (TSXV:CGC)
- Naturally Splendid (TSXV:NSP)
- Mettrum Health (TSXV:MT)
Wherever you’re looking, always be sure to keep Milenkevich’s points in mind, and to do your own due diligence.
Don’t forget to follow us @INN_Resource for real-time news updates!
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Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Naturally Splendid and Mettrum Health are clients of the Investing News Network. This article is not paid for content.
Investing in cannabis stocks can still be a bit of a mystery. A number of states and provinces in Canada and the US are in various phases of legalization for both medical and recreational marijuana use, making it difficult to know what sort of fundamentals to look for.
To get a bit more insight into the space, the Investing News Network got in touch with Alan Brochstein of 420 Investor. In the interview below, he speaks about the current state of the market, cannabis stocks he likes, and what to look forward to in terms of positive catalysts.
Overall, while he believes the 2014 pot bubble may have scared a lot of investors off, things are getting a bit better for cannabis stocks and the marijuana market.
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The state of the market
For starters, Brochstein clarified that the cannabis market in 2014 was a trading market. Rather than being full of quality companies with long term investors, “it was a big momentum trade,” he said.
“I’ve been following the industry for a little over 3 years now, and the public markets are still pretty much not invest-able,” he added, “but the good news is, it’s getting a little bit better.” Brochstein stated that the cannabis market has been in a long downward slide, with the index that he creates losing over 95 percent of its value. However, the index is slowly starting to recover, and the market is now in a resurgence.
What’s driving that turnaround? One catalyst Brochstein pointed to was the release of phase 3 clinical trial data by GW Pharmaceuticals (NASDAQ:GWPH) in March for its drug Epidolex. GW saw its stock double on the news, and the company hopes that its study of the epilepsy drug will confirm the therapeutic benefits of cannabinoids. “That kind of sparked the market,” Brochstein said.
In terms of what to watch for going forward, Brochstein pointed to two catalysts he sees on the horizon:
- The UN Special Session of the United Nations General Assembly on the World Drug Problem; Taking place on April 19-21 2016, the meeting of the United Nations General Assembly is definitely something that Brochstein is watching. “You could have kind of a global change with how nations view Cannabis,” he said.
- Legalization initiatives in the US; In November there’s probably going to be five to nine legalization initiatives on the ballot in the US,” Brochstein said. “That’s a real tradeable event.”
As far as longer term investments go, Brochstein stated that the market is not quite there yet, but as mentioned above, he is seeing improvements.
“On the investment side, there are definitely a few more good companies,” he said. “The valuations aren’t super compelling. They’re not going to appeal to institutional investors most likely. So we’re not quite there yet. But we’re starting to see some real companies with real revenue and they could have better corporate governance.”
Cannabis stocks to watch
While Brochstein reiterated that the valuations he’d like to see are not necessarily there for cannabis stocks yet, he did have a few examples of public cannabis stocks that he’s keeping an eye on. They were
- Indoor Harvest (OTCMKTS:INQD)
- MassRoots (OTCMKTS:MSRT)
- Medicine Man Technologies (OTCBB:MDCL)
“These are all companies who have kind of done things the right way in terms of how they’ve gone public, instead of going through reverse merger,” he said. He also pointed to GW Pharmaceuticals, mentioned above, and to Kush Bottles (OTCMKTS:KSHB), although he currently believes that particular cannabis stock is too expensive.
In terms of the three companies mentioned above, Brochstein spoke about how MassRoots is helping marijuana companies to connect with brands, retailers and end users. “Advertising is really hard in this industry, because you can’t use billboards, you can’t use radio or television,” he said. “Facebook, Instagram, all these social media networks are shutting down company pages. This is an end-around closed system to allow people to use social media when they can’t use their normal social media. So it potentially solves a big problem.”
That said, Brochstein sees a potential issue in the sense that the platform appeals more to the young crowd than to newer users of medical cannabis. “It’s not going to appeal to kind of the more interesting market to me, which is people in their middle ages who are coming back to cannabis, substituting cannabis health and wellness products for pharmaceuticals,” he said. “[Massroots] is of no value to these people.”
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Interestingly, Brochstein said that some of the things that really excite him about the marijuana space are not in the public market yet; branding and compliance companies.
“I think Cannabis is a commodity, and we’re going to see over time that the value chain goes towards chemistry and engineering,{ he said. “So sure, there will be premium flower companies out there, but the reality is, for most consumers, it’s going to move towards brands. They’re just not publicly trading right now.”
Furthermore, he pointed out that compliance is critical for companies in the marijuana industry. “You have to be compliant or you lose your license,” he said.
Legalization
Of course, the legalization of marijuana, either for medical or recreational use, is always a subject that is top of mind for cannabis investors. Brochstein has his own predictions about when investors can expect to see changes in Canada and the US.
“In Canada, I’m very optimistic that it’s going to happen, but I’m pessimistic about the timing,” he said, stating that there will be a number of federal, provincial and local issues to deal with before all is said and done. “I tell my subscribers, don’t expect it until January 1st 2018,” he added. “And that may be early.”
Similarly, in the US, Brochstein believes that the federal legalization process will be longer than many expect. “Two or three years ago, I was loudly forecasting 2020, for federal legalization. I no longer believe that to be the case. After having watched and studied. And I don’t want to say it’s going to be 2024, but somewhere in between those two years maybe.”
That said, there could be a few exciting catalysts to watch for at the state level. Beyond changes he sees on the horizon in California and Nevada, Brochstein stated that he is closely following the path to cannabis legalization in Vermont.
“The governor is for legalization, and they’re getting really really close to passing it legislatively,” he said. “That’s never been done before. That is a game changer, not only because it would happen without a vote from the citizens if it happens, but more importantly, that’s your first east coast legalization.”
Certainly, that’s plenty of food for thought for cannabis investors looking at the space.
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This article was originally published on the Investing News Network on Apr 11, 2016.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any of the companies mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
There’s a specific stock poised to benefit from the growing marijuana market, according to JP Morgan, but it might not be the one you’d expect.
The firm recently raised its target price for Scotts Miracle-Gro (NYSE:SMG) from $70 to $85, citing an expanding hydroponics market as a driver for growth. As per an article from Barrons, JP Morgan analyst Jeffrey Zekauskas believes the company is shifting its focus to the hydroponics market.
While Zekauskas notes that hydroponics revenues currently represent only about 6 percent of the company’s total business, he sees the marijuana space stoking growth in this area.
“The hydroponics market taps into marijuana demand and the company now has a growth option that we think an investor is able to capture for about the price of the traditional business,” he stated in a note.
Scotts was trading up 3.72 percent on Monday at $82.52 per share. The company is up 28 percent so far in 2016.
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Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Click here for the full press release.
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Canopy Growth CEO, Bruce Linton, said:
Management believes it is appropriate and necessary to fund continued investment in our business in order to capitalize on Canadian and international opportunities in a timely fashion all the while considering the potential impact of key future developments in our sector, including pending changes to the Marihuana for Medical Purposes Regulations (MMPR) in response to the Allard decision which are expected to be introduced by August 24, 2016, the tabling of recommendations by the Federal Government’s Marijuana Legalization Task Force which is expected in November 2016 and the introduction of marijuana legalization legislation which is expected to happen by the spring of 2017.
Click here for the full press release.
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Canopy Chairman and CEO, Bruce Linton, said:
Being the first cannabis producing company in North America listed on a major exchange such as the TSX strengthens the sector and is expected to bring Canopy Growth to international institutional investors. The TSX is the stock exchange for Canada’s banks and elite publicly traded companies, and we hope that the addition of Canopy Growth helps signal that the world’s view of cannabis has finally shifted, starting right here in Canada.
Click here for the full press release.