- Published on Tuesday, 17 July 2012
- Written by Betty Davis
The Medical Marijuana sector represents a new unique set of business opportunities and the financial investing world is beginning to take notice.
The financial world of traditional investing has for many years predicated a sound investment thesis on the idea that the safe, stable and established growth companies in the well known and conventional industries represent the best investments to achieve a high rate of return. As most of us have witnessed the market volatility over recent years in the stock market, it is no surprise to discover that
the orthodox strategies defining a high rate of growth for any investment have been questioned and put to the test by the incredible chaos gripping the market since the financial collapse. Entire economies and sectors have been forced to adapt and so too must investors and their philosophies change in order to find new niches to harvest gains. Despite the overall bearish sentiment about global economies, there are still pockets of growth and emerging industries.
The Medical Marijuana industry is one of these new niches of growth which is emerging as a completely new sector for companies to operate business and achieve profitability. While the orthodox investing principles would have most investors allocating capital to electric utility and consumer staples companies, the Medical Marijuana sector represents a new unique set of business opportunities and the financial investing world is beginning to take notice.
The Medical Marijuana Industry, “MMJ” industry for short, has an economy of scale and growth path which is still rather unknown. Such unknowns cause the MMJ investment thesis to have risks as well as opportunities. The MMJ sector consists of many kinds of businesses surrounding the basic function of serving medical marijuana patients. These patients use marijuana as a medicine prescribed by their doctor to remedy certain conditions and therefore these individuals hold a license in states which protect the use of marijuana for medicinal purposes. These patients represent the consumers in this industry and there are many ways in which businesses can serve them. Businesses in the sector can make sales on the product itself, devices to deliver the product, services involved in assisting consumers in various ways, producing wholesale equipment for growing or maintaining product and also consulting, marketing and other services for other MMJ businesses. The sector is growing quickly and so there are a great many MMJ start up companies providing ample opportunities for savvy investors who wish to seize on this new emerging industry. The MMJ market itself is vast and with each new political barrier that is knocked down, the economy of scale for these businesses increases exponentially. A large part of what defines the scale of the MMJ industry is how comfortable consumers are with medicating using marijuana and so as the laws become more lax the industry grows but there are also regulatory risks associated with the businesses because of the conflicting federal and state laws.
Taking well established statistical figures from sources such as the DEA, we have a good idea already of the supply and demand of the marijuana consumption in just the United States. Some metrics estimate the market to be upward of annually $120 Billion dollars. As far as the total market for legitimate businesses in the MMJ industry constraining their sales to licensed patients who consume a regular dose often multiple times per week, we could assume the market is at least in the few tens of billions of dollars. This may not seem to be a very large industry yet, however it is growing and the main point is that it is an industry with very few established businesses so the few companies that exist are already snapping up market share by leaps and bounds. If we assume the MMJ sector could perhaps be a 40 billion dollar market this year, if we constrain our analysis to only the MMJ businesses which make up most of the industry then there are about 40 companies which specialize in the business. Roughly half of these businesses are private so there really are only about twenty or so publicly traded companies in the market right now to choose from for the savvy MMJ investor. In this article we will quickly analyze ten of these companies which have very high potential to expand their businesses and give a high rate of return for those investors looking for unorthodox investment strategies which while having their own unique risks offer lucrative prospects. There are many risks investing in such a new industry and developing businesses but there are also many possible rewards in being positioned in what could be the next new fast growing MMJ product or service.
One of the larger risks by far in the MMJ sector is the risk of regulatory action or a change in the law pertaining to MMJ products and services. The political environment surrounding the MMJ industry is very volatile right now and the regulatory framework is in a state of flux. There is a growing social movement across the United States to change the MMJ laws and so recently there have been many headlines in the news about these laws changing from state to state. The main issue for the MMJ investor is how to allocate capital into a sector which is so exposed to unknown regulatory change and how sudden regulatory changes could change the landscape for the businesses. The federal laws have mostly been a risk for the dispensaries in each state. Some of the dispensaries have been shut down by the federal government, however most in California and Colorado continue to operate under the protection of the state laws. These dispensaries are privately owned anyway so investors really only have to be concerned with the indirect effect on sales of the MJ product should the dispensary get shut down. Many of the producers of the MJ product in regular plant form or pharmaceutical forms of marijuana like extracts and oils are exposed to these risks, because their sales of the MJ product are directly dependant on the dispensaries ability to operate. Most of the companies producing product for dispensaries to sell also have licensing agreements with the dispensaries or growers as regards a particular strain or extract formulation for which the company get royalties on a quarterly basis. The key for investors for these types of businesses is diversification across a multitude of dispensaries with which they have a partnership. The MMJ investor mitigates such risks by choosing to invest in a MJ producer which sells product or licenses product to a vast array of dispensaries, not just one or two dispensaries and preferably a set of dispensaries in different states so that even if one of the states changes the MMJ laws which shut down dispensaries there, the MJ producers product is still receiving revenues from dispensaries in the other states which have not changed the laws.
The other types of MJ businesses manufacture devices to deliver dosage or offer products or services to other MJ businesses so in those businesses the rule still applies in that it is best for the investor to rely on companies which have a diverse set of client customers so that all of their business and revenues do not come from a single company or even many companies but in a single state. The other way diversification can in some way mitigate the regulatory risks of investing in the MMJ sector is by allocating capital across many of these types of businesses. This means putting capital to work in a mix of MMJ businesses like MJ producers of oils, extracts, plant and other consumables, MJ businesses providing consulting to growers and dispensaries or providing technology specific to the industry like “WeedMaps”, MJ businesses involved in manufacturing devices like vaporizers and all of the other types of businesses. With such diversification across the business types in the industry, the MMJ investor can allow the portfolio to withstand a sudden shock caused by a regulatory change which affects one aspect of the business.
The MMJ sector contains many possible niches and many companies an investor can choose as an investment. Most of the businesses are start ups and some of the most popular and well-known companies in the MMJ sector are small companies listed on the pink sheets and OTC market exchanges. Ten of these companies deserve to be highlighted here because they offer the investor the greatest potential for reward in the form of return on investment versus the potential risks to the business. The stocks have the following tickers; CBIS, FSPM, GRNH, GWP, MJNA, RFMK, SRER, MDBX, SFIO, HEMP.