Participating in an early-stage industry is always difficult for an investor. There aren’t nearly as many analysts covering companies as there are for larger companies like we see in the S&P 500. And there is always a high rate of failure; this is understandable as most companies that enter a new space are going for the same initial turf. As an industry becomes more mature, there are typically just a few players with entrenched positions.
Investors are interested in a young industry for the same reason as company founders—they see growth potential and want to be a part of it. Everybody wants to be a part of, or invest in, the “next big thing.” But on the flip side, both companies and investors are still trying to figure out some basic puzzles. How big can the industry get? What’s the most efficient business model, and the best allocation of capital? How does it integrate with other products and services in our economy? These are hard enough to answer about a mature industry, and nearly impossible in a nascent one.
Recent Catalysts Hint at Exciting 2015
The recent proposal of the CARERS Act and statements from President Barack Obama have spawned a lot of interest and momentum in cannabis stocks, and it is especially noticeable after such a languid period last year. By and large, the past few months for cannabis stocks have been marked by low trading volumes, a distinct lack of catalysts and poor earnings reports.
Investors looking for a quick entry into cannabis stocks to play what they see as momentum around legalization progress don’t have many good options. That’s not meant to be a slight against any particular publicly-traded company out there right now; federal laws have cut the industry’s young legs out from under it. With federal restrictions being what they are, even a cannabis company with the greatest idea on earth can do little to profit from it, or even protect it. As a cannabis company today, you literally can’t get big, and can’t even think about operating outside of states with medical and recreational usage laws.
Investors know what they’re looking for—they want legalization. They want interstate commerce, and no restrictions on banking. They want any pharmaceutical company in the country to be able to purchase cannabis for medical research if they so choose.
So any headway that is made on any given day, like the news of the CARERS Act or Obama’s recent comments to Vice News, are considered new information in the eyes of the market. Both of these recent political catalysts are centered around providing patients who want access to have it, more so than the complete ending of prohibition.
In addition, leading 2016 presidential candidates Hillary Clinton and Jeb Bush have both made public comments hinting that they wouldn’t stand in the way of voters’ support for decriminalization and legalization. It’s uncertain whether cannabis will become a noteworthy issue in the presidential or other high-profile races next year, but the odds of it happening seem to be rising by the day. Why? Because politicians follow polls.
Polling Data Hits a Tipping Point
It’s time to take stock of recent polling data, where not just the specific numbers but the breadth of positive results is the key takeaway. A popular Gallup polling question is the “Do you think the use of marijuana should be made legal, or not,” which seemed to take a turn south in 2014 with 51% responding “Yes, legal.” This followed a 2013 reading of 58% of Americans feeling cannabis should be legalized.
But a more important polling result just came in earlier this month; the General Social Survey, conducted just once every two years, reported that 52% of Americans now favor legalization. This is up 9 percentage points from its 2012 survey, and those are a key 9 points. They make all the difference in the world to a politician that may be running in one particular state but really wants to speak to the whole nation.
We have already seen politicians from both parties lend support to various legalization efforts, and given the tax ramifications blended with societal evolution, this trend should only be increasing in light of polls that consistently now place U.S. voter support between 52% and 61%.
Parting Thoughts for Now
The biggest risk investors need to consider when looking at momentum is that it can evaporate just as quickly as it appears. And if the underlying company you’re investing in doesn’t have a fundamental underpinning—growing revenues, actual net earnings, a strong balance sheet—then you could be caught without a floor on the stock price.
Equity shares (stock) are nothing more than the right to share in profits after everything (and everyone) else is paid off. Most of the companies currently trading under the banner of cannabis are years away from reporting any net profits; in fact, some seem to be years away from recording any sales.
If roadblocks to legalization start falling like bowling pins, then yes, probably any company with the right words in its name will rise in price … for a while. But investing this way is not only a high-risk option in the present, it also robs you of valuable time spent preparing for the future of cannabis investing. And the landscape of the future will be much, much different than today.
We reiterate our siren call to investors to use this fascinating time to do more reading and watching, and less investing in publicly-traded companies with zero revenues. If you truly believe in the scope and size this industry can have in the next 10 years, any time spent building a foundation of knowledge and finding trusted news sources will be time well spent.