First, let me preface this article with some things you should know about me. First of all, I have never smoked marijuana in my life–never. Nor have I used any derivatives of marijuana. I do however believe that a person has the right to do whatever they want with their body as long as they aren’t hurting anyone else. I did after all vote in favor of legalizing medical marijuana in Arizona. Having said all of that, I have had a lot of clients and friends ask me over the years if investing in pot stocks is the next big thing. The movement to legalize marijuana in all 50 states has been gaining momentum for some time now. In fact there was a conference held in Las Vegas in 2016 of venture capitalists who explored the profit potential of investing in pot. So why not get in on the ground floor of something that has tremendous profit potential?
As things stand now there are several hurdles that have to be overcome before investing in pot stocks would make sense to the average investor. First of all possession of pot is still illegal in all 50 states at the federal level. Therefore any company dealing directly in pot wanting to incorporate and issue shares will not be able to legally as there are no stock exchanges that will allow trading of this kind of stock. Part of the problem is that the majority of legal pot dealers in states like Colorado run their business on a purely cash basis. Thus, making it nearly impossible to complete the regulatory filings required by federal regulators to issue tradable shares. So, the probability of investing directly in marijuana stocks is pretty much zero.
But what about the ancillary businesses that supply the equipment used to grow and distribute the pot?
True, there are companies that manufacture the hydroponic equipment used to grow and process the product that you can buy stock in. But now I’m going to do something I rarely do in this column and that is make a stock recommendation—DO NOT INVEST IN THESE STOCKS!!! Why? The reasons are many but can best be summed up by telling you that the major stock exchanges have classified many of these stocks as “toxic”. This does not mean the exchanges have rules against investing in controversial stocks, (exchanges want to make money like the rest of us). It means that the technical or fundamental aspects of the stocks are so bad they receive this label. In my own personal experience I have seen these stocks go literally wild on the exchanges. One which shall remain nameless went public at $10.00 per share in 2014 and within two weeks dropped to $2.50 per share, then stopped trading altogether for a month. When it began trading again the price opened at $.50 per share, went to $.63, then to $.22 then stopped trading completely. Do you really want to risk your hard earned money on an investment such as this? Hardly a winning proposition.
Part of the reason for this is that, (and this is totally my opinion), the vast majority of growers and dealers in states such as Colorado may be very good at growing the ‘product’ but that is where it ends. Most of them do not have a business model, only distribute through ma and pa storefront outlets and have little to no business sense in regards to manufacturing and selling on a large scale.
Yes, the arguments in favor of full marijuana legalization are numerous and it appears that the country is slowly moving in that direction. However, in my opinion, from a business standpoint it is still in its infancy and has the potential to go in a variety of directions and not all of them good.
But I prefer to look at history to prove my point. In this country just prior to and after World War I, the automobile was considered the next greatest product to hit the markets and demand was nearly unlimited. At that time there were approximately 800 domestic auto manufacturers in the United States. How many manufacturers are there today? Less than a dozen with billions of dollars made and lost along the way.
Yet I still have clients who are adamant that pot stocks will be the next gold rush or tech boom. I have been told that if I won’t sell to them they will just go somewhere else and invest in them. To that I say good luck, you’re going to need it.
If you have any questions about this article or I can be of assistance, feel free to contact me at 480-296-9556.
Purity Wealth Advisors
4111 E. Valley Auto Dr. #104, Mesa AZ 85206
Office:480-307-9909, Cell 480-296-9556
Purity Wealth Advisors is not a broker/dealer and is independent of Raymond James Financial Services Inc., Member FINRA/SIPC. Securities offered through Raymond James Financial Services Inc. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.
All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Rudy Eidenbock and not necessarily those of Raymond James. Raymond James does not allow trading in marijuana-related securities.