​Pros and Cons of Investing in Cannabis

Al Foreman |

At times, it’s still hard for me to believe that the words ‘cannabis’ and ‘industry’ are regularly paired in the same sentence. For decades, marijuana as a plant has been engulfed in stigma and misinformation, making it difficult for legislators to accept its clear advantages as a medical aid and an opportunity for investment. Despite the great misconceptions that have plagued cannabis, the plant is now legal for medical use in almost half of all US states, and can be legally consumed by all adults 21 and over in four states. We believe that we have turned the corner on social and scientific acceptance for the plant, and to an objective observer, there should be no doubt that cannabis is being evaluated with increasing levels of interest for its myriad uses.

As a result, the cannabis industry provides an appealing platform for investing. There are now a number of listed companies that touch the plant itself, as well as a growing universe of private equity funds and other vehicles that allow investors to enter the space and invest in private companies without taking public market risk, and both paths allow interested stakeholders to put their money where their interests lie. All investments have theirs pros and cons, so let’s spend some time examining both in relation to investing in cannabis:



Pros

  • Can you hear the BOOM?
    The growth of the industry is booming. Last year, Colorado alone raked in over $996M in revenue from cannabis sales, and collected more than $135M in taxes. The cannabis industry as a whole has doubled in size each of the last two years, and despite existing on a legal, adult-use basis in only four states, expected new market expansion and increased consumer adoption have numerous forecasts predicting its growth over the next five years to reach astronomical levels.
  • Marijuana is Recession Proof
    It might be too early to describe cannabis as a consumer staple, but when analyzing the performance of publicly traded companies in the cannabis industry, it’s clear that they don’t follow the same arc as non-cannabis companies. While the industry doesn’t yet have the history to establish any steadfast rules for its inevitable rise and dips in performance, one could easily defend cannabis as a recession-proof commodity, given its relatively inelastic demand on the part of recreational consumers and medical patients.
  • High Utility of the Plant Supports Numerous Revenue Streams
    Cannabis is being used in a variety of ways, and more are being invented by fast-growing startups with each passing month. Whether it’s in the form of menstrual cramp relief, gourmet edibles, or obesity treatments, the advent of the new and various delivery mechanisms highlight the way in which innovation is driving the growth of the industry. The future looks bright for the universe of companies tasked with converting the plant into various vehicles for medical relief and adult-use consumption and we don’t expect they will stop creating derivative uses or new products anytime soon.

Cons

  • Regulatory Uncertainty at the Federal Level
    Despite the fact that a number of states have taken the initiative to legalize cannabis for medical and adult-use, cannabis remains on the Federal drug schedule as a narcotic in the same category as heroin, ecstasy, and LSD. Given its status on the federal level, cannabis companies still risk potential undue punishment for operating their businesses legally under state law. The federal regulatory risk (with the right combination of a prohibitionist judicial and/or executive branch, the cannabis industry could find itself navigating choppy waters again with little warning. Furthermore, the federal stance on prohibition restricts marijuana businesses in their ability to receive tax breaks and gain access to banking, which makes their competitive positioning versus non-cannabis businesses particularly challenging.
  • Fully Fragmented Market
    Market conditions dictate that each state has a separate set of laws for their legal cannabis programs. Seemingly most states that have enacted legal cannabis laws have had difficulties in regulating the substance in some form or another due to the inconsistent regulatory frameworks. Whether we look to the period in which California municipalities aggressively banned commercial cannabis activity, the recent concern over marijuana monopolies in Ohio, or numerous pesticide recalls in Colorado, it can be difficult to successfully establish consistent evaluation techniques for investments in inconsistent markets, or in a regulated cannabis industry in a state without uniformity or federal oversight.
  • Invest or Not?
    Any investment, regardless of industry, possesses risk. In order to determine whether a particular entity is worth investing in, one must weigh the potential risk against the potential reward that could be realized. In the case of cannabis, its rapid growth, ability to generate derivative revenue streams, and status as a recession-proof commodity lend itself as a topic worth examining for investments; however, it should be done with a great deal of forethought, diligence, and patience.

    I’ve found the process of launching an investment practice in the cannabis space to be extremely insightful and intellectually challenging, and I’d recommend any that are interested in the prospects of investing in cannabis to get off the sidelines, get informed, and get involved in this exciting industry.

Al Foreman is the Chief Investment Officer at Tuatara Capital, the largest private equity fund in the cannabis industry.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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