Recreational, Medical Marijuana and Hemp; Still about Risk and Return
It seems like everybody is talking about making money in cannabis these days. How will you make out?
Governments will do just fine. In October (The decriminalization and licensing of marijuana in North America – Part I) we looked at the inevitability that marijuana will be legalized in some way in almost every North American jurisdiction. I said that the lure of easy tax revenue would be too strong for elected officials to resist, with very little risk to their re-election campaigns. No risk, lots of return, it’s the right time.
The voters agreed. In the midterm elections on Nov 4, Alaska, District of Columbia and Oregon voted to legalize marijuana. That makes four states plus D.C. that have not just decriminalized but legalized recreational cannabis. Nineteen states allow it for medical purposes, and fourteen have decriminalized it. 74% of the states (plus DC) are on the path to extra tax revenue.
Mark it down: every state will soon allow cannabis in some format. The governments will make a lot of money off the cannabis and hemp industries. So will the promoters and the investment bankers. But will you?
To know where we’re going, we first have to know where we are.
Let’s start with our buds to the north. Because the growers in Canada are licensed federally rather than state by state, it’s easier to compare leafs to leafs, without having to account for regional differences in local business models.
These charts represent the four publicly traded cannabis growers in Canada.
Ouch. The charts look like downhill skiing in Vail, ranging from the blue hill with some moguls for Tweed all the way to black double diamond for Thunderbird. Bedrocan had a huge enthusiastic spike when as a shell it announced a cannabis deal; the massive spike was followed by a plunge in value. OrganiGram opened in August, 2014 at $2.40; three short months later it’s trading around $1.10. Regardless of corporate success, I’d expect continued weakness in each of these as escrowed shares get released.
Then look at US-listed cannabis stocks. Agritek, Cannabis Sativa, MJ Holdings, and even the broader Marijuana Index: none of these have been able to stay anywhere near their market highs for the investors. MJ was particularly painful for those early investors, as it dropped from a $26 high in March of this year to its current thinly-traded low of $1.77.
If more data is needed, look at the painful plummet of MediJane (from a high of $1.60 to its recent low of three cents) matched by the destruction of value in Cannabis Therapy (year high $3.00 to a year low of $0.13).
Much risk, negative returns. That’s where we are.
Keep in mind that every industry is cyclic. Remember the dot com rush of the late 1990’s, and the inevitable tech crash in March 2000? How about the highly leveraged collateral debt obligations and mortgage backed securities of the mid 2000’s – they smashed and almost took down the global financial markets starting in August 2008. Gold ran to over $1800 an ounce in 2011 – now it’s suffering around $1150. Oil spurted over $145 in June, 2008 and is now trading around the $80 level. Some investors made fortunes that will last for generations.
That’s the nature of all markets – they go up, they go down, they go sideways. The individual stocks making up those markets sometimes move together (like uranium producers should all rise when the spot price of uranium appreciates over time) and sometimes they don’t (not all tech companies trade up or down when Apple releases an new iSomething). Some will win, some will lose, some will choose to sing the blues.
Cannabis stocks obviously went up too far, too fast. They naturally came back down. So the market is telling us to strap on your helmet and buckle up for a rough ride: the stock prices will fluctuate wildly, with little correlation to the underlying news of CannabisCo, the general market or macro factors like legislative changes. A rational risk / return analysis is impossible because there is no way to accurately identify or quantify the risks involved.
And we’re not talking about risks specific to any one company – we’re talking about industry-wide risks, like:
- Will there ever be conclusive empiric peer-reviewed proof that CBD’s actually have any beneficial medicinal impact?
- What if the FDA testing processes show a placebo effect at best, or, the worst case scenario, negative health implications for what are supposed to be medicinal products?
- Will third party testing of the products be mandatory, like in mining, or can the producers operate their own quality control labs?
- What municipal zoning restrictions will be imposed locally?
- What will the federal government do next? Will the banks be able to move currency derived from cannabis sales? Will the importation of better strains of cannabis be permitted?
- Will BigTobacco ever be allowed to participate in the industry?
- What kind of insurance can be bought to de-risk a cannabis factory?
- What new game-changing application or product is lurking around the corner
These risks and other BigRisks are unquantifiable, and that means Bud the Average Investor needs to see the possibility of massive returns on his cannabis investments to justify taking these risks. That’s where we are today. Timing. So the next question is, how do we as investors identify the company-specific risks, minimize Lady Luck’s influence, and increase our chances for success? The next article will propose a road map to guide us through.
Mr. Clausi is an experienced investment banker, executive, director and shareholder activist. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, ... <Read more about Peter Clausi>