December 15, 2014

Part Two of a two-part Global AgInvesting series on The Emerging Medical Marijuana Market

By Marc Davis

As the medical marijuana (MM) market heats up, a variety of investment options have become available for those who want to invest in this sector. 

Investors may now put their money in every element of the MM supply chain from growers to dispensers and everything in between – processors, pharmaceutical firms, manufacturers – and in ancillary businesses such as growing equipment and even in media dedicated to news of the industry.   

But while investor sentiment is generally enthusiastic, others, including even some entrepreneurs in the MM industry are cautious and somewhat bearish about the sector, at least for the short term. Derek Peterson is one of them.

Peterson is CEO and founder of the Terra Tech Corp, a publicly traded company focused on farming and medical cannabis. After a decade on Wall Street with Morgan Stanley

he left the firm and founded Terra Tech, currently valued north of $100 million.

"The medical marijuana environment is both [full of opportunities] and difficult," he said.

"The major problem is the dichotomy between state laws and the federal government. States have approved it, the feds still ban it. But everyone understands the potential size and scope of the industry."

Peterson says investors contemplating investing should conduct due diligence before investing. 

Leslie Bocskor, an investment banker with an interest in the MM sector and chairman of the Nevada Cannabis Industry Association urges investors to look at the management team of any private MM company before investing.

"Check them out on LinkedIn," he said. "Look up their references. Where were they previously? Did they come from a publicly traded company? How well do they present information about their companies?"

Peterson points out that, "Private firms are not legally required to disclose information. They may not have been audited and whatever information is available, may not be accurate."

Publicly traded firms, by contrast, are required to file documents with the SEC and information about them is more readily available

Investors who want to invest in a public firm should, "Make sure all the SEC filings have been made," says Peterson.  "CEOs may be more accessible. There's investor relations people you can talk to."

Nevertheless Peterson cautions that there will be failures, "…so investors should have a high tolerance for risk. Look what happened in the dot com sector.  There'll be no overnight wins in this business."

Bocskor holds a similar view.  "When federal prohibition ends, the [sector] could become overcrowded and there'll be failures and consolidation."

"In some three to five years [if and when] the feds lift the medical marijuana ban, big pharm and big tobacco will get involved," Peterson said. "Smaller companies that have survived that long and have built their brands and customer loyalty could be ripe for acquisition by the bigger players."

A good way to learn about the MM business and stay up to date on industry news, according to Peterson, is through the 420investors.com. website. The site publishes a free weekly newsletter, hosts a live chat room, offers investor tips and conducts webinars (web-based seminars).

Other news media covering the MM sector include High Times and The American Cultivator. Several informative blogs also report on industry developments, weedblog.com, among them.

Many already-established firms publicly traded over-the-counter, or on major stock exchanges, are making and selling cannabinoid-based medicinal products and or services and investors may buy shares in these companies.

For investors not interested in investing in the product itself and/or in any of the supply-chain businesses from grower to patient, there are other opportunities in ancillary businesses. 

The National Directory of Cannabis Products and Services, recently launched by Mentor Capital, lists cannabis-related companies directly or indirectly involved in the medical and recreational marijuana industry.

Among the firms and organizations listed are third-party products and service providers, such as indoor growing systems (hydroponic), equipment and supply vendors, and institutions and individuals conducting research and development of cannabis-based products.

Mentor Capital, (OTC Ticker Symbol: MNTR). publishes the Cannabis Index, listing some firms traded over-the-counter, and on the NASDAQ. The weekly index also lists the share price of firms, gain or loss, market capitalization and sales numbers.

As for the eventual development of a futures exchange for trading marijuana, or a futures contract in that commodity to be traded on an exchange, a spokesperson for the Chicago Mercantile Exchange (CME), declined to comment, citing CME policy restricting speculation on plans for the future.

A futures contract on unprocessed marijuana for future delivery could be used by growers to hedge against price and weather risks and by various users as a price and supply guarantee.

"Industrial hemp [another by-product of the marijuana plant] is a sleeper market," Bocskor said. "It has huge potential but it does not get much media coverage."

If and when the federal law banning medical marijuana is eliminated, big pharmaceutical companies will likely get involved in research, development, manufacturing and selling cannabis-related medications. 

Formula patents and trademarked names and brands will not be awarded until the federal law is changed. But one of the major benefits of universal legalization of MM is the anticipated tax revenues. Both the individual states and the federal government are in need of money, and the MM industry could become a substantial source of cash.

What about unlicensed wholesale growers, homegrown marijuana and the inevitable criminal black market? What impact will these two categories have on investments in the sector? These are the X-factors, unknowable and unpredictable.

"When marijuana is de-scheduled by the government, it'll probably be regulated like alcohol," Bocskor said. 

Markets are cyclical; bust follows boom, and vice versa. The MM market may be expected to act accordingly. Both Peterson and Bocskor predict that many firms will fail as well as flourish.

"But the industry has a bright future," said Bocskor.

This report is not an offer to sell, nor a solicitation of offers to purchase securities, nor is it an endorsement of the companies or enterprises mentioned.

Update: It was predicted and so it has come to pass – But much sooner than the experts expected.

A provision deeply buried in the 1,603-page spending bill passed by Congress on December 14, explicitly forbids the Department of Justice and the Drug Enforcement Agency (DEA) from interfering with states' marijuana laws.

Many analysts believe that the federal removal from the books of its previous anti-marijuana law will have a bullish impact on investment prospects for the sector.

Section 538 of the bill says, in effect, that these agencies of the federal government shall not conduct raids in any states "…that authorize the use, distribution, possession or cultivation of medical marijuana."

Tom Angell, a pro-legalization activist and founder and chairman of the board of the Marijuana Majority, a national advocacy organization, said in a statement to the media,

"Congressional leaders seem to have finally gotten the message that a supermajority of Americans wants states to be able to implement sensible marijuana reforms without federal interference.

"This legislation greatly reduces the chances that costly and senseless DEA raids will come between seriously ill patients and the doctor-recommended medicine they need for relief."

A voter-approved ballot initiative for legalization in Washington, D.C., however, was blocked by the bill. 

– Marc Davis