How to Invest in the Legalization of Marijuana

The highs and lows of planting Cannabis stocks in your portfolio

Although Ohioans voted against legalizing recreational and medical marijuana, investors are buzzing about marijuana stocks and the possibility of mega returns if more states join in.

Public sentiment is certainly leaning toward legalization. A recent poll by Gallup found that 58% of Americans believe the use of marijuana should be legalized, more than double the support the idea had in the mid-1990’s.

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More access means more consumers, and more profits, consequently, some cannabis stocks have outperformed the market as well. Viridian Capital & Research—a specialized boutique banking and strategic advisory firm that provides research, investment banking, investor relations, and corporate development services to emerging growth companies in the cannabis sector—saw the stocks it measures in its index rise more than 17% in the second quarter.

For every high flying stock, however, there are a barrage of stories about companies that have failed in this alluring sector. “It has no federal regulation, and no banking. It’s still in large part a cash business,” says Art Hogan, Managing Director and Chief Market Strategist at Wunderlich Securities.

BE.com spoke to Scott Grieper, president and founding partner of Viridian Capital & Research. Greiper said when it comes to investing in Medical marijuana companies, many of the same rules should be applied to investment decisions about any company.

BE.com:   How do you evaluate companies that you will work with?
Greiper: We start by taking a close look at two risk areas: The first is management: These are usually small companies that do not have seasoned executives in place. You may have guys with good ideas, but you normally don’t have people who have true expertise in growing a company. The literal DNA of this sector is that you have folks who have been growing in their back yard, in some instances even selling. Very different skills are needed, however to start a business, attract capital, and go public. The other is whether a company is prepared to compete against established players. Once you pass the million-dollar mark in revenues, you’re causing a disruption in the market. At some point, your competitors are going to get aggressive. They may offer the same product at a cheaper price, they may come up with a better solution, or they may whisper in customer’s ears about your ability to grow. Most important, does the CEO have the maturity to know when he needs help? We work with companies who are willing to allow us to add real governing expertise by appointing board members and other areas of infrastructure that will give the company credibility with investors.

BE.com:  There are many different sectors in the cannabis industry. From an investment stand point, the top performers have been: The consulting service sector, which capitalizes on the need for licensing, facilities, etc.;  the biotechnology sector, with companies that try to capitalize on the anticipated growth of cannabis pharmaceutical products; and the infused products and extracts sector, which focuses on cannabis-related products such as edibles and extracts. How does an individual investor decide which companies and sectors are worth a try?
The cannabis opportunity is fast-growing and global. Still, investors shouldn’t romanticize the possibilities. They need to make sure and do their homework. These companies file 10-K reports with the SEC, which describe management. They file 10-Q   reports that can help you evaluate performance. This information is public domain. Technology has made it easier than ever to find out information and news about a company or a sector.

Greiper says you also want to look at things like who were the early investors in the company. There has been more than one example of less than savory characters that have been embedded in the early stages, and that’s caused problems. You can also download their industry report which has detailed analysis and information about the different sectors and companies that are at the forefront of this brave new world in investing.