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The Grass Isn’t Always Greener: Is the Marijuana Industry a Good Investment?

The Grass Isn’t Always Greener: Is the Marijuana Industry a Good Investment?

The green wave is underway. The cannabis industry is in hyper-growth mode. Whether you are for or against the use of marijuana doesn’t really matter anymore. The green train is rolling down the tracks and it is gaining speed. The marijuana industry has always been profitable in the underground economy. Now it is starting to bring those profits to legitimate, and often publicly traded, companies. So, should you invest in this fast-growing industry?

Voters have been paving the road to riches for the legal marijuana industry. In the last few years, we’ve seen more and more states approve the use of cannabis in some form. Medicinal use is now legal in 31 states and the District of Columbia. Recreational use is legal in nine states and D.C. Support for legalization is at an all-time high, with 60–65% of Americans thinking it should be legal. Our Canadian neighbors have voted in full legalization effective October 17.

Legal marijuana sales in North America exploded to $9.7 billion in 2017, a 33% increase over 2016. It is projected that sales will reach $24.5 billion by 2021—a 28% annual growth rate. Those are impressive growth numbers that will attract a lot of investors. Just last week, Coca-Cola, Constellation Brands (owners of Corona beer, Svedka vodka, and many other alcohol brands), and Molson Coors all reiterated their interest in the cannabis drink market. Those public announcements brought a lot of attention to the industry and its investing potential.

But despite all the attention, the favorable trends among voters, and the growth projections, the cannabis category is still small, fragmented, and volatile. A quick look at the trading in the shares of Tilray (TLRY) will tell you a lot of what you need to know. On Monday of last week, the shares were trading around $150 per share. Just a month ago, it was trading at $25 per share. On Tuesday, the CEO made some positive comments about future growth after the U.S. Drug Enforcement Agency (DEA) announced that it had approved Tilray’s plan to import a marijuana product and test its potential in treating a neurological disorder. The stock jumped sharply, briefly trading at $300, doubling the previous day’s price. As of this writing, less than a week later, the stock is trading around $100 per share. That’s a 20% loss for the week, after a 100% one-day gain. Can you stand that kind of volatility?

The rest of the marijuana sector has seen similar volatility as investors try to figure out which companies will be the winners and which will be the losers. Besides the volatility, the stock prices don’t line up with the earnings of the companies. It’s also important to note that marijuana is still illegal at the federal level, which is preventing traditional banks from providing lending that a growing industry often needs. Wild volatility, misaligned earnings, and a lack of traditional funding sources are not a good combination for investors. Speculators? Maybe. Investors? Definitely not.

This is a great example of how the emotion of greed can wreck an investment plan. The fear of missing out leads usually rational people to make irrational decisions. We saw the same type of investor behavior when the dot-com bubble burst earlier this century. And we saw it more recently with the bitcoin and cryptocurrency mania over the last year or so.

With the green wave of legalizations likely to continue, and the changing public perception about marijuana, some investors will do very well and will make millions. Others will lose their shirt. Are you willing to take that chance?

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