The green rush: should you invest in cannabis?

    25 May 2019

    How big is the legal cannabis industry? Every time I think I’ve seen the highest estimate along comes another breathless puff piece with an even bigger number to chew on. $50 billion? Not even close. $100 billion? That’s only the US, according to some figures. One consultancy reckons you’ll be able to stick another zero on that within ten years. A trillion dollar weed industry? Surely not.

    Pot has become the topic du jour on amateur investment forums. Some say it’s the new bitcoin (perhaps not the most flattering comparison). Search online and you’ll find dozens of investment vehicles promising healthy returns if you invest in the marijuana industry. The world is shifting towards legalisation, they say, and you can be among the lucky few to cash in.

    Is investing in cannabis shares the sure bet it’s made out to be? The experience of many investors already suggests otherwise. While many of the first weed companies to go public made big initial gains, most tumbled as quickly too. At the end of last year, just when Canada — the world’s largest cannabis market — announced its supply was running out, it triggered a rout in share prices.

    Yet some cannabis shares have done well over an extended period.    Canopy Growth, the first pot producer to be listed in North America, has doubled in value since last year and now supplies much of Canada’s government-regulated cannabis industry. GW Pharmaceuticals, the British company which processes 90 tons of cannabis a year to develop its anti-seizure medicines for MS sufferers, has performed solidly since its initial boom in 2014.

    So where’s the next winner? While the number of publicly listed cannabis companies remains small, there are new opportunities emerging. The London Stock Exchange, through its smaller submarkets, is doing its best to woo the cannabis world, in particular Israeli medical companies (the Holy Land being a hub for all things biotech, weed included). Kanabo Research, a company working on vaporised medicines, is expected to float this summer.

    What about start-up funds which re-invest your money directly into cannabis-linked businesses — the vast majority of which are still private —and share the returns? Given most of these funds are relatively small, and aren’t usually available via your high street broker, it is notoriously difficult to know what you’re getting — or be sure that your expert is as knowledgeable as they say. In the US, the Securities and Exchange Commission has issued warnings about scammers posing as cannabis gurus. The most established London-based fund, Sativa Investments, debuted in May last year at just under 3p per share before climbing to 8p a few months later. Like most cannabis funds, though, it’s had its share of misfortune too: after a wave of excitement ahead of Canada’s legalisation last winter, it lost half of its value in days.

    To anyone who knows the industry, this isn’t surprising. As a market, cannabis is exceptionally volatile. Why? Like many emerging markets, it still faces a lot of uncertainty. Look at the US: for all the millions made in Colorado and California, the business remains at the mercy of Washington DC (hence why it’s begun spending big on lobbyists). A change of wind on Capitol Hill — a reversal of the > decision to bar federal agents from pursuing businesses operating within state law, for example — could bring the whole house crashing down.

    But what if the White House decides to follow Canada and scrap its federal prohibition altogether, freeing American companies to enter other markets? US pot companies could double in value overnight. Their Canadian rivals, currently steady performers, would almost certainly slump, having lost their export monopoly. Will that happen? Who knows. You’d be taking a big gamble either way.

    Things are slightly more stable with cannabis-based pharmaceutical companies such as GW Pharmaceuticals. But it comes with the same risks as any drug developer: development costs, risks around patents, and the prospect of serious reputational damage if things go wrong. And is it really wise to back a company with all its eggs in this particular basket?

    So what’s the best way to get rich from pot? From what I’ve seen, the companies which succeed are those which put in the elbow grease. Touring America’s de facto cannabis capital Colorado two years ago, I interviewed marijuana magnates who had built multi-million dollar businesses from scratch. Most had got in early, taken risks, and operated in periods of major uncertainty (until recently, Colorado’s pot shops were unable to access bank accounts, meaning that sellers were left with sacks full of cash).

    I asked them about pot-focused investment funds. None of them had needed to borrow capital beyond their initial investment (the waiting time between cultivation and bringing in cash is hardly a long one). Yet all had been inundated with offers from potential ‘partners’. The founder of a cannabis-focused bakery told me how she’s even had wannabe investors setting up meetings under false premises, only to open their suitcases of greenbacks when she showed up.

    It is ironic, as some have noted, that pot investments should become fashionable at the same time as ethical investing, which usually takes a dim view of anything linked to tobacco or big pharmaceuticals. It is hard to justify why it is morally acceptable to make money on cannabis but not tobacco, from cannabis medicines but not anti-depressants or insulin for diabetics.

    Still, that doesn’t seem to be affecting the fashion for cannabis stocks. The market will inevitably rise on the weight of speculators’ cash alone, but will they sustain their value? The problem is what happens when the high wears off.