Companies that produce medicinal and...ahem...recreational drug have caught the eye of investors. Here's our take.
We recently received the following question from one of our shareholders. If you have questions you'd like to ask our team, please email us at [email protected].
I would feel like a fool if didn't ask about the tremendous growth evident in the weed/pot/hemp markets. Have you given this any research? -- Don
We’ve done some initial investigation, but this industry is still very young and faces significant hurdles — not least of which is the ability to use banks. Because banks are federally regulated and marijuana isn’t federally legal, there are questions about the banks’ ability to accept marijuana-related cash flows. As a result, most banks have steered clear of the industry.
Then there’s the question of where the value in the industry will end up. Marijuana is a commodity, and while there are different types, very few are so exclusive that they could be considered to have a competitive advantage.
Now, a few celebrities are trying to cash in on the trend, including Willie Nelson, Snoop Dogg, Wiz Khalifa, and the families of Bob Marley and Jimi Hendrix. But it will be difficult for investors like you or me to catch that wave.
Right now, the most promising part of the business appears to be real estate, as there are some very specific requirements, both physical and legal, to be able to grow significant amounts of marijuana. The landlords renting buildings to growers have been able to command above-market rents because of their unique offering.
Of course, because marijuana isn’t federally legal, you can’t transport it across state lines, so these real estate owners are benefiting from a (probably) temporary lack of supply. Today, growers have to be relatively close to their customers.
However, if the federal government drops its ban on marijuana, that will no longer be the case, and low-cost growers would quickly put high-cost growers out of business — kind of the definition of a commodity product — which will be likely to put downward pressure on real estate prices in high-cost markets.
Innovative Industrial Properties IPO’d in late 2016 and is trying to capitalize on legal marijuana from the real estate angle, but we’ll have to see how long its business model provides strong returns. Getting old warehouses ready to be modern marijuana-growing facilities isn’t cheap, so if we end up seeing a falling rent environment, its returns on investment could suffer.
Then there’s GW Pharmaceuticals, a UK-based company looking to apply cannabinoid solutions to treatment of, or relief from, multiple sclerosis, cancer, and other diseases.
These are a few of the early players, and you’ll find several more on over-the-counter exchanges, but so far we’ve not found a truly attractive way to invest in the legalization movement.