Let me start off by saying that today's essay is not for
everyone. But as Chief Investment Strategist for
, it's my job to bring readers the best aggressive growth
investing opportunities the market has to offer.
If it just so happens to come from an industry that some find
morally objectionable, then so be it.
But I received a question from a subscriber the other day that
I know many of our readers have been wondering about: Should I
invest in marijuana stocks? If so, which ones should I be looking
Most Americans, about 62%, live in states where cannabis of
some sort is legal for medical or recreational use. And more
states are either legalizing marijuana or taking fairly
significant action to decriminalize.
This is a good move. In fact, had Ohio approved its recent
legalization initiative, the pro-cannabis United States would
have, for the first time, had enough votes in the Electoral
College to decide the presidency.
Cannabis is not a drug. Cannabis is food. I know that's a
controversial statement, but I believe it. There is a scientific
basis for this: Our bodies contain two types of receptors, CB1
and CB2, whose sole function is to uptake special chemical
compounds known as cannabinoids. If you do not ingest
cannabinoids, then your body simply makes them.
Cannabis has been shown to have remarkable healing properties
for a huge swath of medical conditions. It is known to be
cytotoxic to breast cancer. It is an excellent supplement to
chemotherapy to decrease nausea. It stimulates appetite in
I have seen clear evidence that cannabis can literally make
Karposi sarcomas fall off. It's painful, but it works. Marijuana
is an excellent treatment for those who struggle with mental
illness and for whom sleep is elusive. It's the best choice for
treating epileptic seizures, and for those who otherwise would
have to take anti-seizure medication, such as my wife, who had a
brain tumor removed.
It is impossible to overdose, and it's relatively cheap. The
side effect is laughter. Marijuana can be administered in a
number of ways, from the traditional rolled joint, which I
personally think is a poor health choice, to transdermal skin
patches, edibles, vapor cartridges and highly concentrated forms
like wax or shatter. For patients who desire to use cannabis but
who prefer not to "get high," a substance called citicoline can
be added that mitigates the psychotropic effect while still
delivering the profound medical benefits.
The Economics Of Pot
A master grower, either in an indoor grow facility with
artificial lights, a greenhouse or simply outdoors in soil, can
typically produce a pound of cannabis for less than $1,000.
Economies of scale can halve that. It takes special lights --
about 1000 watts per 25 square feet of grow space, or canopy,
which requires a lot of power. Cannabis also likes nutrients and
water at a certain pH.
A pound of cannabis flower, or bud, goes for about $3,000 in
today's market. An ounce, the most common unit of measure, ranges
in price in legal dispensaries, but $250 is a good average.
This already looks like pretty good business, right? I mean,
if it takes $750 to grow a pound and you can sell it retail for
three grand, that's a decent spread.
But, oh boy does it get better from there. You see, the money
shot with cannabis is the same as it is with any commodity -- the
profit is always in the value add. (You want to be a farmer or do
you want to be Archer Daniels Midland [NYSE:
With cannabis, the value add is extraction. This is the future
of the business. A pound of cannabis, worth $3,000 as bud, is
actually worth a lot more if you do the work of taking all the
cannabinoids out. This extraction process, typically accomplished
using a solvent like CO2 or butane, leaves pure cannabis oil.
This oil can be used in edibles or vapor cartridges or other
A joint has about 10 mg of THC, the principal psychoactive
chemical found in cannabis. A 500 mg vapor cartridge costs about
$70 retail. I know from my research that a pound of flower
contains roughly 68,500 mg of oil.
Let's do that math. Buy a pound for $3,000. Extract the
cannabinoids. Then sell them at retail. 68,500 divided by 500 is
137, which means that at $70 each, the cannabinoids from just a
pound of flower would yield 137 cartridges worth $9,590. One
plant in a greenhouse can produce about a pound on average.
The potential for scale is readily apparent.
This is big business. Already in Colorado, excise taxes on
cannabis exceed that of alcohol, and some have suggested that
weed will wind up being bigger. I think that's true.
is a Schedule 1 drug under the 1971 Controlled Substances Act, a
class higher than cocaine. This classification was bestowed by
Richard Nixon in stark opposition to what his own blue-ribbon
panel recommended. It means that the drug has a high potential
for abuse and no known medical uses, which is curious.
Why? Take a guess who actually holds the patent on medical
marijuana. If you guessed Uncle Sam, you're right. The old guy
has been talking out of both sides of his mouth about weed ever
since it was outlawed in the early 1930s.
Why did that happen? Because the DuPont family didn't want
nylon to have to compete with cheap hemp fibers, and William
Randolph Hearst didn't want his timber interests in the Pacific
Northwest to play second fiddle to hemp, either. So they joined
forces and bought a law, one that Nixon and Nancy Reagan ran
with. The fact is, almost everything that the Just Say No
campaign taught about cannabis is false. But cannabis is still
there as a Schedule 1 "drug."
Now, the Obama administration has been hands off, letting the
states decide the issue for themselves. And Congress, to its
credit, has defunded the Drug Enforcement Agency's efforts to
interdict medical marijuana in states where it is legal. That's
all well and good.
Should You Invest?
But there is still a problem for potential investors in this
space, and that problem is the Financial Industry Regulatory
Authority (FINRA). Wall Street's main regulator just isn't going
to countenance an S-1 filing from a cannabis company looking to
go public while the drug is still classified as a Class 1
controlled substance. There has not been such a filing to date.
Every cannabis company that trades has been the product of a
reverse merger, not an IPO.
Almost every one of these companies, in my view, is a
Eventually, cannabis will be reclassified and FINRA will allow
IPOs. Big Pharma and others will step in to meet the demand,
which I estimate exceeds $100 billion a year in the United States
alone. But until that time, I cannot advise anyone to take a
position in the market as currently constituted. Many of the
companies trading are, in my opinion, less than honest.
We're just not there yet.
When we are, and I suspect this is five or seven years from
now, the companies that have the greatest likelihood for success
will be those that have significant vertical integration that
spans the value chain from clone (very few plants are grown from
seeds) to the dispensary shelf. Extraction is one key, and
consistent quality is the other.
I have a lot of friends and a strong personal interest in this
business. I keep up with the developments. And when the time
comes to invest, I will let you know. We're just not there
As I mentioned, my job is to tell you about the best aggressive
growth-investing opportunities the market has to offer.
Unfortunately right now, marijuana stocks just aren't positioned
to make investors huge returns in the short term. But I have
uncovered a handful or other opportunities that are ripe for big
gains in 2016...
I compiled these ten under-the-radar investments into a list
that I call my "
10 Shocking Predictions for 2016
." If you'd like to watch a brief presentation that outlines all
of the opportunities on this list -- and show you how to profit
from each of them in 2016 --
I invite you to click here