Marijuana stocks catch fire
A representative from Sky High smokes from vaporizer during the Champs Trade Show in Las Vegas on Jan. 21. The trade shows attracts distributors of smoking paraphernalia and merchants from around the country. Photographer: Jacob Kepler/Bloomberg
Marijuana stocks are on fire this year, with plenty of investors suddenly willing to risk being burned.
Shares in almost any company with the slightest association to marijuana got a huge lift in late 2012 after voters in Colorado and Washington legalized recreational use. Twenty states including California allow medical use.
Practically all of the stocks in this sector — including two based in San Diego County — are lightly regulated and traded over the counter, so they lack the transparency offered by major exchanges.
Most have little revenues and no profits; some have no assets or sales at all. At best, these stocks are highly speculative.
Last month the Financial Industry Regulatory Authority reissued an August statement titled “Marijuana Stock Scams”: “We are reissuing this alert to warn investors not only about the potential for fraud in this arena, but also to reiterate the risks of investing in thinly traded companies about which little is known,” FINRA said.
But the warning did little to dampen investor enthusiasm.
Stock prices and trading volume have surged again this year with press accounts of long lines outside pot shops in Colorado, which allowed sales to anyone over 21 starting Jan. 1. And Tuesday the U.S. Senate passed a farm bill that, if signed by the president, will legalize the cultivation of hemp, a nonintoxicating cousin of marijuana that produces valuable fibers and health supplements.
This appears to have sparked a speculative frenzy, particularly among small investors: The most active stock Tuesday for customers of Fidelity Investments — ahead of Facebook and Apple — was Hemp Inc., which gained 54.5 percent in value to 26 cents a share.
At 21st on the Fidelity list, ahead of health-care giants Pfizer and Johnson & Johnson, was Medical Marijuana Inc., a San Diego company that reported about $604,000 in total sales for the third quarter.
To optimists, the eventual demise of marijuana prohibition looks like a historic opportunity.
A report funded by The ArcView Group, an investment company, estimated the U.S. market in legal marijuana market at $1.44 billion in 2013, with growth projected at 64 percent to $2.34 billion in 2014 and 600 percent to $10 billion in five years.
But venture capitalists say good investment opportunities are few and far between. A booming market is one thing; earning consistent profits is quite another.
As you might expect of an industry that until very recently was illegal, many pioneers are long on enthusiasm but short on operating discipline.
A competitive shakeout will certainly cure such shortcomings over time. After all, U.S. railroads went broke throughout the 1800s. And the Internet boom of the late 1990s was lousy with profitless startups that wiped out shareholders.
Then again, marijuana is an agricultural product. Prices in the ag sector tend to converge near the cost of production over the long haul.
And they don’t call it “weed” for nothing; marijuana is laughably easy to grow. A farming or accessories manufacturing firm will have a hard time building the type of wide moat against competitors required to reward long-term shareholders.
