The Valuentum analyst team walks through changes in the marijuana regulatory landscape, the plethora of risks speculators face while dabbling in marijuana stocks, and the hopes that some might be long-term winners. ~8 mins.
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Tickerized for stocks associated with the marijuana industry.
Brian Nelson, CFA:
Can marijuana stocks burn your portfolio?
This is Brian Nelson for Valuentum Securities and joining me for today is Mr. Kris Rosemann and Mr. Chris Araos, and we are going to talk all about marijuana stocks. Mr. Kris Roseman would you like to take us through some of the dynamics that you are seeing across the industry?
Kris Rosemann:
Sure, there has been a massive change of opinion in the general U.S. population on the consumption of marijuana over the past decade or so. Research providers such as Pew Research or the Gallup Poll are pointing to 60% of Americans are now in favor of the legalization of marijuana according to their research. Whereas a decade ago it was about 60% were opposed to the legalization of marijuana. So that just gives you an idea of where Americans are coming from now. With the younger generations continually accounting for a larger percentage of the population, one can expect that figure will continue to go higher from here.
Also, we had some interesting results from the most recent election round. Eight of nine proposals for recreational and medicinal marijuana saw positive results. Four states approved medicinal marijuana: Florida, Arkansas, North Dakota, and Montana — and while that may not seem like a big deal, there is three fairly heavy Republican states in that group, and to see that kind of shift in typically such conservative states is an important thing to understand. Four states that approved marijuana for recreational use were Nevada, Maine, Massachusetts, and California. Now Maine and Massachusetts are important in that they are both East Coast states. Legalization of marijuana now has a stronghold in the eastern seaboard as well as the West Coast, where the entire West Coast of the United States has now legalized marijuana, with California passing the law for recreational use.
California is even more important because it is the largest state in the Union as far as population goes. With the legalization of marijuana in California, that brings the total U.S. population that lives in states where marijuana is legal to nearly a quarter of the entire population. What that is going to do is push the debate on to the plate of federal legislators. So they will be forced to make a decision one way or another. Whether or not that ends up in favor of the marijuana industry remains to be seen as we now have a Republican President and a Republican-heavy Congress. So there could be some major hurdles there. But you also have to remember these legislators are acting on the behalf of the industries within their states. If nearly a quarter of the state stand to benefit from the proliferation of marijuana, then you can expect those legislators to push fairly heavily for more favorable federal reforms.
Brian:
So the marijuana industry as an investment seems like they are in a state of flux right now, given that marijuana is legal in a number of states, but on a federal level, it is still illegal, which makes investing in the marijuana oriented equities very difficult and very uncertain, even more so than the fact that many of these stocks are thinly traded, traded over the pink sheets.
Just a couple of years ago the Financial Industry Regulatory Authority (FINRA) came out with an alert to suspend trading on five different companies: Fusion Pharm (FSPM), Canna Business Group (CBGI), Growlife (PHOT), Advance Cannabis Solutions (CANN), Petro Tech Oil and Gas even. There is a lot of concern about the legitimacy of these investment vehicles — so not only is the investment framework clouded by the federal-versus-state dynamic, but some of these companies may not be even “investable.”
Kris:
Right — going along with that uncertainty between the different legislations, there is a very high degree of compliance risk between complying with state laws and federal laws. We also have to remember that marijuana and marijuana-related products are things that people are putting into their bodies, so there is an additional level of risk that goes along with the compliance with those kinds of regulations as well. People keep pointing to how this is going to be an explosive growth area – and why can’t there be a Budweiser (BUD), or an Altria (MO), Marlboro of marijuana in 20 years? But there is just so much risk involved right now that picking any sort of winner, any sort of trend that will point you to winner in the long run is nearly impossible at this point and time.
Brian:
That’s a really, really good point because if on the federal level marijuana is legalized what is stopping a company like Altria from creating a new line to compete with these upstarts. So these over-the-counter equities, there is just not a lot of certainty, not a very clear path to success.
Kris:
I wouldn’t even say that Altria would have to start up their own line–they could just scoop up a handful of these fledgling companies with their massive amounts of capital that they have. Just kind of tuck them into their operations.
Brian:
That would be an investment case for potentially owning one of these.
Kris:
Right.
Brian:
Is that what investors are thinking — that they’re going to get saved by a buyout from a larger company?
Kris:
That might be what investors are thinking. I would not put a lot of stock into that line of thinking. You want to be able to analyze a company from a fundamental standpoint, not just grab a stock and hope someone buys it at a higher price later. That’s just a trading speculation in my mind.
Brian:
I think, in many respects, that is probably what we are seeing. Is the speculation that there may be some winners, but when you think about how markets evolve, especially in consumer products — when you think of soda companies, Coca-Cola (KO), Pepsi (PEP), Dr. Pepper Snapple (DPS), are kind of the Big 3; cigarette manufacturing you have Altria, Phillip Morris (PM), and Reynolds American (RAI). There are not that many long-term survivors.
In many respects, we could see a roll-up dynamic occur (in marijuana). But who is going to be the winner behind that? For every Coca-Cola, maybe hundreds of failing beverage companies for every Coca-Cola. There is a lot of speculation risk for these marijuana stocks. We think FINRA has done a really good job of alerting investors of not only the thinly-traded nature of these securities, the fact that the accuracy of the publically-available information may not be as clean as one would like, and the fact that some of these had to be suspended.
A lot of caution should be embraced by any investor considering marijuana stocks as an idea. This is Brian Nelson for Valuentum; thank you very much for joining us today.