The potential economic return of investing in the cannabis industry is significant. However, the current value placed on most of these companies is completely overblown and you have to be smoking something to invest at the current market caps of many of these securities.
Companies with no business to speak of are trading at market caps in the hundreds of millions of dollars. Investors should remember how quickly the dot.com bust happened before investing in some of these companies.
Cannabis is now legal for medical purposes in 20 states with only Colorado and Washington making it legal for recreational use.
However, cannabis is illegal under federal laws and the Supreme Court in Gonzales vs. Raich (2005) held in a 6-3 decision that the U.S. Constitution allows for the federal government to ban the use of cannabis for medical or recreational purposes even if local governments approve it.
This ruling has led the National Exchanges to be wary about allowing the trading of public companies in the cannabis industry. Additionally, the companies are nervous about making filings with the SEC since it is a federal government enforcement agency.
This is one of the reasons the majority of these securities trade in the over-the-counter market and in the penny stock arena.
Also, this legal confusion leads institutional investors to avoid the industry. Most investing and trading is taking place by retail investors.
I believe this is one main reason for unreasonable valuations. Retail is less inclined to look at P. E. ratios and capital structures. This is especially true for investors who are interested in this new industry, but appear to never have been active investors in the cannabis industry before.
The SEC should make it clear that the cannabis industry is welcome and encourage it to use the current reporting rules of the securities industry. Of course, this does not ensure investor protection, but hopefully it will allow for better disclosure of any rists of investing and potential actions by the federal government, and less fraudulent activity in the sector.
Cannabis has some very important medical benefits for conditions such as providing relief of nausea, vomiting, movement disorders, epilepsy, inflammation, glaucoma, psychiatric symptoms and pain. These are not imaginary medical benefits. People do use these medical benefits in order to obtain prescriptions in order to get high, but the medical benefits are real.
The question is how will the the federal government handle the cannabis roll out to other states. Will the government move against the 20 states where it is now legal and the many others that will soon follow? I tend to doubt this will happen.
It is my opinion that the industry is here to stay and will grow substantially over the next few years. This may allow for significant returns for investors and substantial tax revenues for states.
But be careful. Many of the stocks already have the full potential, and more, of their return in their current price. Investing in companies at market caps that are unreasonable has the potential for disaster. Also, look carefully at the business model, and make sure there is a sound opportunity to build a business with experienced and successful executives.
Investing in the cannabis industry can bring substantial returns, but it can also bring about the total loss of your investment.
Wouldn’t it be nice if the regulatory bodies would help create an atmosphere that assisted investors in understanding and investing in this new industry?
It seems that the regulatory role of trying to stop and catch the "bad guys" makes it difficult or impossible to help encourage and foster a new industry.
A new industry in the U.S. has sprung up. It is developing quickly and many changes and new laws will be enacted.
Let’s hope this happens and it all doesn’t just go up in smoke.
Damon D Testaverde
Network 1 Financial Securities Inc