Marijuana shares cloud the minds of investors

Since some American states started to legalize marijuana last year, many gamblers are very keen on cannabis shares. After the initial euphoria ended, the green gold rush seems to have regained some of its popularity in the stock market.  

Marijuana is a controversial issue, but it is now legal, with restrictions, in Alaska, Colorado, Oregon, Washington and in the District of Columbia. In 23 states the medical use of marijuana is allowed.

Other states are debating intensely the partial opening of the market and, according to polls, a majority of the U.S. population is now in favor of decriminalizing cannabis.  

There are also some initiatives worldwide that are trying to promote the legalization of marijuana. The Global Marijuana March, which is carried out every year in early May in many world cities, is one example. 

It not known to the author how many Caymanians would be in favor of legalizing ganja, but recently the local police commissioner called for the consumption and possession of small amounts of ganja to be decriminalized.  

Meanwhile, there is big business in the marijuana business. According to the ArcView Group, in 2014 the U.S. cannabis market grew by 74 percent to $2.7 billion, and by 2018, the market volume is forecast to be $10 billion. In the light of that growth, it is no surprise that in Colorado, in reference to the 1860s and 1870s, people speak again about a new gold rush.  

As always, when a new growth industry arises, investors immediately prick up their ears. Speculative oriented investors are particularly interested in such prospects. As a result, many cannabis shares literally exploded in the first quarter of 2014.  

However, the bubble burst quickly and the prices subsequently fell almost back to baseline levels. But this year, the fever appears to be renewed. The Canna-Index, which has 55 stocks connected with the sector, is up 23 percent so far this year. 

First major investors warm up for the segment  

The interest is fueled by news about the involvement of major investors who already had success in other areas. The start was made by the German-born Silicon Valley billionaire Peter Thiel, who became rich through early investments in companies such as Facebook and Paypal.  

As a partner of the venture capital firm Founders Fund, he invested several million dollars in the private equity firm Privateer Holdings, which has specialized in the cannabis business. This step in some places was considered as a kind of accolade for the whole segment. 

Further evidence of the prevailing gold rush is the fact that a cannabis symposium took place in May at the Investors’ Fair Money Show in Las Vegas. In October, the German-based Deutsche Cannabis AG will organize the first cannabis trade fair in Germany. But the interest of many speculators is large and growing and is unlikely to be slowed down by major legal risks.  

These risks, among other things, have to do with the fact that the U.S. federal government still classifies marijuana as an illegal substance. Recently, President Obama said he sees no chance that Congress will change the law at federal level in the foreseeable future.  

 

High flyers currently come from the medical field  

One of the hottest bets in the field of medical marijuana is the British company GW Pharmaceuticals, which markets the cannabis drug Sativex. It is described as a drug that helps patients with multiple sclerosis who suffer from spastic cramps.  

The share price since mid-2013 has increased more than tenfold, and in the best case scenario, experts see a great future for the market leader in Cannabis prescription drugs.  

However, it should be noted that a market capitalization of 2.11 billion euros (US2.3 billion), according to the British broker Hunt, is currently only backed by estimated sales equivalent to 45.4 million euros. Much of the existing business potential may, therefore, in the short term already be included in the price. 

GW Pharmaceuticals also has losses for the time being, but that is generally the norm in the still young industry. Many of the listed cannabis companies make no money and in some cases generate little or no revenue. Also, many black sheep are involved in the sector, and they try by means of fraudulent activities to attract investors, prompting a warning from the U.S. Securities and Exchange Commission. 

With regard to the valuation, the picture looks a little better for Insys Therapeutics. The biotech company makes its money with marijuana-based painkillers. The share price since the Nasdaq-IPO in 2013 has increased from $8 to $64.32; the positive here is that the company already earns money.  

Analysts expect 2015 earnings per share of $1.69 and $2.70 for 2016. In addition, the earnings over the next five years should rise by 28 percent on average. Measured by this, a price-earnings-ratio of 23.5 for 2016 is entirely possible. 

But an investment at Insys also has risks. Generally, industry representatives have a relatively high-risk profile. How thin the line between fortune and misfortune is, can be demonstrated by MedBox, for example. The share price of that company shot up after the IPO in late 2012.  

This was explained by the hope that the company’s vending machines could in future also be stocked with marijuana. But currently the company is plagued by investor complaints about improper balance practices, and as a result, the shares have mutated into a penny stock. 

Many other marijuana-shares also still trade, unsurprisingly, far from the former highs. The volatile price behavior is typical for an industry that is still in its infancy. The small size of the industry is evidenced by the fact that the shares included in the Marijuana Index Global Composite have a combined market capitalization of $6.84 billion.  

If capital flows in or out of the industry, this small market capitalization will contribute to strongly fluctuating share price movements.  

Along with what are in many ways immature business models, this suggests that it would be wise to approach the sector with some skepticism.  

Anyone who wants to invest some capital should consider this as play money and rely instead on companies that deal with marijuana for medical use. 

marijuana-funds-Douglas-Chioupek-sm

Douglas Chioupek, co-founder and chief executive officer of MedMar Healing Center, looks at the root structure of a young marijuana plant in San Jose, California, in this 2013 photo. A fight next year over whether to allow recreational marijuana use in California may serve as a tipping point as legalization proponents press their campaign in other states. – Photo Bloomberg News
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