Looking to give your portfolio a high now that Michigan voters gave the green light to recreational use of marijuana?
Well, let’s just say you’re not exactly the first one out there to try to catch a buzz on this one. But if you don’t watch out, you could easily get caught.
“It’s fertile ground for getting burned at this stage,” warned the CEO of Sigma Investment Counselors in Northville.
Sure, weed stocks are media darlings. On Wednesday, for example, CNBC ran the odd headline: “Marijuana stock Tilray up 30 percent after Jeff Sessions resigns under pressure.”
Are some speculating here that the marijuana industry won’t have U.S. Attorney General Jeff Sessions, a critic of legalization, to kick around any more — perhaps paving the way for the end of the U.S. prohibition? Or maybe giving policy makers more room to make it easier for banks to serve cannabis businesses?
OK, seems like a stretch to me. Yet you get all kinds of cloudy reports and proclamations when it comes to putting your cash in cannabis.
More: Legal marijuana in Michigan: What you need to know
More: Why you need to watch highs from marijuana stocks — and the Dow
“I think people are waiting for the Berlin Wall of cannabis prohibition to topple over in the U.S. and I think yesterday’s election removed a few more bricks from that wall,” Tilray Chief Executive Brendan Kenny told CNBC on Wednesday morning before the Sessions news was announced.
Granted, Tilray and some other weed stocks have seen extraordinary gains for much of 2018 — and a few started smoking following the election news that Michigan became the 10th state to legalize the recreational use of marijuana. Michigan already allowed use for medical purposes.
Wall Street had a close eye on the vote in Michigan.
Also in the news: Missouri and Utah voted to legalize medical marijuana. North Dakota rejected a marijuana legalization proposal Tuesday.
Of course, recreational use of marijuana became legal in Canada on Oct. 17.
Tilray, a Canadian pharmaceutical and cannabis firm, filed for its initial public offering in June with an IPO price of $17. In late September, it hit a 52-week high when it traded on the Nasdaq exchange briefly at $300. The market cap hit $14.4 billion.
Really? Who would ever expect to make nearly 18 times your money on marijuana in a few months?
Naturally, we saw a bit of a crash.
Tilray fell through a good part of October. Yet it closed at $139.60 a share Wednesday, up $32.74 or 30.64 percent.
Much of the marijuana mania has been fueled by dreams of how big the house party could grow. But realistically, there continue to be hurdles when it comes to cashing in on any cannabis craze.
Chasing marijuana mania on Wall Street could easily turn into a bitcoin blunder or a dot-com bust. And we’re still talking about a controversial industry.
First, marijuana, of course, remains illegal in the United States at the federal level. So it’s doubtful a big U.S. brokerage is going to start recommending pot stocks as long as we’re dealing with a substance that remains illegal under federal law.
Many mainstream financial institutions won’t even discuss pot stocks now. Research arms, such as Morningstar, do not have analysts tracking the marijuana industry.
And remember, there will be limits even under new state laws. Smoking marijuana in public still won’t be legal in Michigan under the new law, and you can’t drive under the influence of marijuana either.
While recreational stock pickers might be tempted to light up here, more sensible types call the marijuana market a highly speculative play.
Some maintain that it’s the wrong time to buy, as exchange-traded funds, such as U.S.-listed Alternative Harvest ETF have surged since lows in August.
Optimism is driving the marijuana market but much is unknown about how the industry will grow going forward.
“So much is on the what if?” said David Sowerby, portfolio manager for Cleveland-based Ancora Advisors.
Sowerby said in the last three months he has had only one client casually inquire about marijuana stocks. Few firms conduct research on the space.
Cowen, which offers an “Ahead of the Curve Report” on unique investment topics, issued a report in April indicating that it expects the cannabis industry to hit $75 billion in sales by 2030.
Sowerby said he wouldn’t dismiss the possibility that the cannabis industry ultimately could be a long-term opportunity. But right now, it’s highly speculative and could only be a very small piece of a more aggressive investor’s portfolio.
The lofty prices of some marijuana stocks — as well as the unknowns ahead — make it more challenging to know what’s a realistic stock price. Many question whether one is paying too much here for some marijuana stocks.
“What’s the growth rate? What’s the future cash flow?” Sowerby said.
The cannabis industry certainly found more reason to party this week following Michigan’s vote, as well as seeing Sessions resign at Trump’s request.
“Michigan’s action definitely continues the building of momentum in the industry,” said Charlie Wilson, chief revenue officer of California-based Green Bits, which provides software that helps with the tracking of inventory and regulation involved with legal cannabis sales.
Michigan, he said, is a key state given the size of its population, as well as the infrastructure that’s already in place for the medicinal market.
Over time, he said, he would expect Michigan’s legal marijuana sales to grow by five times to as much as 10 times when one includes the adult recreational customers.
“There’s a ton of momentum behind the industry,” Wilson said.
With Sessions out, he said, there is even more hope that some rules can be put in place that would enable far more banks to work with the cannabis retailers and others.
Dispensers, growers and others can find it difficult to operate efficiently because of the limitations involved with obtaining banking services, insurance and even software, Wilson said.
Banks that accept marijuana industry money are concerned about running afoul of U.S. money laundering and other laws.
What could make marijuana stocks more interesting is what happens with banks — as well as some of the reports in business publications about established names who could be making a play.
Bloomberg ran a headline in October stating: “The Next Big Thing is Weed Beer.” Coca-Cola has disclosed that there’s a possibility at some point that it could offer cannabis-infused drinks.
Barron’s reported Wednesday that “some big names are showing an appetite,or at least the munchies, for marijuana stocks traded in the U.S.”
Bank of Montreal’s total U.S.-traded marijuana stock investments, held through several subsidiaries, were valued at $73.2 million at Sept. 30, according to Barron’s calculations, based on a filing the bank made to the Securities and Exchange Commission.
But again, remember, these are a few Canadian banks where the country has legalized adult use of marijuana.
Yes, some investors already made big money in pot stocks. But some experts warn that we saw a similar kind of frenzy just a year ago when bitcoin soared to outlandish highs only to crash in 2018.
More: Recreational marijuana to be legal nationwide in Canada on Wednesday
No one, of course, wants to put a match to their money.
In September, the Securities and Exchange Commission warned that crooks may use the hype and media coverage about the legalization of marijuana to promote investment scams.
Many marijuana stocks are thinly traded at a few bucks a share and remain highly volatile.
Signs of fraud include:
- Guaranteed returns. If someone promises you a guaranteed high rate of return on a cannabis call, it likely is a fraudulent scheme.
- Unsolicited offers. If someone reaches out to you through social media, an email, a text, or a phone call regarding an investment “opportunity,” it may be part of a scam. Fraudsters may use a boiler room sales staff to make cold calls to investors and promise annual returns of 25 percent or more.
Never underestimate the power of social media to hype “sure bets.”
Con artists know how to drive up a stock price for a lesser-known stock, only to leave everyday investors holding the bag.
Contact Susan Tompor: firstname.lastname@example.org or 313-222-8876. Follow Susan on Twitter @Tompor.