DOJ's 'cease fire' on state marijuana laws sparks fresh investment buzz

DOJ's 'cease fire' on state marijuana laws sparks fresh investment buzz
Bracing for the highs and lows of cannabis-industry stocks.
DEC 29, 2015
It is still way too early to put any serious money behind the fast-growing marijuana industries, but the potential is certainly there, and worth watching. “Right now it's a basically a penny-stock industry in its infancy, but it will grow geometrically unless the federal government decides to enforce federal laws,” said Paul Schatz, president of Heritage Capital. So far, 40 states have legalized the use of medical marijuana in some form, and four states have legalized marijuana for recreational use. But those state laws are still in technical violation of federal laws, which deem most marijuana distribution and use illegal. Earlier this month, with President Barack Obama's signing of the 2016 omnibus appropriations bill, the federal government extended for a second year the so-called “cease fire” of federal marijuana-law enforcement over state laws. That is good news for advocates of legalized marijuana, and could also be good news for investors in the various growing and distribution industries. “All of the state-level programs out there right now are currently in conflict with federal law, but this cease fire bars the Department of Justice from interfering with the state-level laws for another year,” said Steph Sherer, executive director and founder of Americans for Safe Access, which she describes as a 100,000- member, patient-based organization. The future of the $4 billion legal marijuana industry is quickly gaining momentum with recreational-use initiatives currently in the works in California, Maine, Massachusetts and Nevada. And Ms. Sherer expects to see enhanced medical-use legislation proposed in as many as 17 states next year. But even in the context of such fervent state-level political activity combined with hands-off federal enforcement, the investment community has yet to fully take shape. As one might expect, there are dozens of fledgling penny-stock companies now being traded over the counter, displaying the kind of volatility that would likely rattle the most aggressive investors. For example, GrowBlox Sciences (GBLX) is currently trading at 14 cents a share and is down 61% from the start of the year. But in 2013, it rallied to a 70% gain. CannaVest Corp. (CANV), at 15 cents a share, is down 92.8% this year, after falling 92% last year, but gaining 470% in 2013. Cannabis Sativa (CBDS), at 82 cents a shares, has declined by 89% this year, following an 820% gain last year. “My advice would be to invest in bakeries in states where marijuana usage has been approved,” joked Bob Rice, chief investment strategist at Tangent Capital. “There's not really any public companies that you can seriously consider investing in,” he added. “Soon enough some grown-up company, quite possibly a big tobacco brand, will start swallowing up the little local dispensaries and create a real national brand, and waiting for that might be the best bet for average investors.” Mike Saul, an independent analyst and blogger at PaulandSaul.com, had to shelve a book he was writing about cannabis stocks because the extreme price volatility kept altering the storyline. “Most of the stocks in the group are bulletin board stocks, which means the chance for manipulation is there, but we're still in the early stages,” he said. “What happens with every new frontier is the cream will usually rise to the top, but I don't know if we're at that point yet.” To be clear, every stock in the highly fragmented universe isn't a fly-by-night penny stock. Cara Therapeutics (CARA), is trading at more than $15 a share, and is up 55% this year, but it wasn't listed last year. GW Pharmaceuticals (GWPH), is trading at more than $68 a share, and up 3% this year after gaining 63% last year. “If you're investing in this space, it should literally be money you expect to lose,” said Mr. Schatz. “Most of the penny-stock companies will not be around in three-to-five years, and until the federal government changes the laws, it is high-risk squared.” He compares the investing risks and opportunities to Internet stocks in the early 1990s. “There's not a lot of credibility with these companies, and investors don't understand the industry,” Mr. Schatz said. “It's a subsector of the economy that's ready to explode, but you've got the federal government standing in the way. Right now, this is not like buying AOL in 1998, because this is a complete and utter crapshoot.”

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