Marijuana – Is it Economic for You?

The long and windy road of legalizing Marijuana in U.S states begun some time ago, States currently with legalized possession for recreational use include: Alaska, California, Colorado, Maine, Maryland (decriminalized 10g or less), Massachusetts, Minnesota (decriminalized), Nevada, New York (decriminalized unless open to public view), North Carolina (decriminalized 0.5oz or less), Oregon and Washington.

In addition to the legalization for possession and recreational use, U.S states have certainly taken a less server legal position, should possession not have yet been legalized, ranging from misdemeanour to felony following a first offense, while certain States, which are becoming fewer in number, permit only medical use.

The water gets even murkier when considering the laws associated with the sale, transportation and cultivation of marijuana, where possession may be decriminalized, whilst the sale is considered a felony, with transportation illegal.

The differing laws, state-by-state, certainly make it a challenge to legally invest in the marijuana industry, investment in itself possibly being classified as illegal, since the cultivation and sale of marijuana remains illegal under federal law in multiple States.

As a result of the legality issues faced by certain investors, access to the product is via a more indirect route, including grow lights, software and even payroll services as the sector continues to expand.

Other investors have been more direct in terms of investment focus, investing in Marijuana stocks, with Marijuana indices also present to provide investors with a blended return for comparative purposes and investment should the shoe fit.

For one index in particular, the North American Marijuana Index, stocks need to meet the following criteria to qualify for inclusion: Constituents must have a business strategy focused on the marijuana or hemp industry, while also required to meet the index provider’s minimum trading criteria. The index comprises of 28 constituents and as of 31^st January 2017, had a trading volume of 20.83m, certainly not a small number for such an apparently nascent sector.

The medical market is certainly the safest investment strategy, most states recognizing the medicinal usage of marijuana, with a material shift in legislation taking place across 9 states last November, Florida being one of the key states to legalize medical use.

Either way, there’s plenty of opportunity abound as States pass through new laws, with laws becoming less stringent with time, estimates for the Florida medical marijuana market currently stands at $85m in 2018 and a rocketing $705m by 2021.

As we have seen across many embryonic sectors, a period of consolidation is expected with many smaller companies likely to fail, particularly as legalization widens across the U.S and the larger multinationals enter the space. Investing in marijuana stocks for now would certainly need some due diligence and focus on the larger distributors for medical usage would make sense over the near term.

Returns have not been small, Marijuana stocks riding high through 2015 and 2016 as shown in the chart below:

 

Source: Viridian Capital Advisers

Some companies that are worth looking out for include Kind Financial, which Microsoft is pairing up with to develop compliance software to enable the government to monitor marijuana from leaf to market, while for the more risk-tolerant, direct investment into companies manufacturing product will deliver rewards, but of course, with it comes sizeable risk, including breaking federal law with firms struggling to obtain bank financing due to federal laws.

With projections particularly bullish on the both recreational and medical use of marijuana, it certainly looks like a sector to ride high on, though with availability of information on the lighter side, tracking commodity trading news is a must, usage expected to not only widen in the U.S, but beyond.