Industrial hemp leads the way toward legalization in the US. The 2018 Farm Bill, which was signed into law this past December, included a provision that removed industrial hemp from the federal government's list of controlled substances making it a lawful agricultural commodity. The provision, which was introduced by Senate Majority Leader Mitch McConnell of Kentucky, received strong support from the tobacco farming states. Hemp represents an attractive replacement crop for traditional tobacco farming communities as the demand for tobacco continues to wane due to its public health concerns. Currently, cannabis is recreationally legal in 10 states and medically legal in 33 states. Federal legalization does not seem too far away as politicians and voters continue to see the economic potential of cannabis.

Getting attention from the Fortune 500. The marijuana investment community is not just comprised of speculative retail investors. In recent years, the industry has received a deluge of billion-dollar investments coming from major industry leading corporations like Anheuser-Busch InBev (BUD), Constellation Brands (STZ), MolsonCoors (TAP), Coca-Cola (KO), Imperial Brands (IMB.L), and Altria (MO). Another telling indicator is the recent trend of executives and high-level talent leaving places like Apple (AAPL) and Amazon (AMZN) to work in cannabis. Ben Cook, for example, was a supply-chain executive at Walmart (WMT) and Apple before becoming the COO of MedMen Enterprises (MMEN.CN). If you believe in the earning potential of marijuana, then you’re in the company of the titans of industry.

Valuations are gettin’ high. Many veteran investors look at today’s stock valuations in the in the marijuana space and are reminded of the valuations seen during the dot-com bubble. Canopy, for example, is currently trading at an enterprise value to last-twelve-month sales multiple of roughly 104 times according to Thomson Reuters. Nevertheless, some of the biggest and most influential companies in the world were born out of dot-com bubble. Even if you bought into Amazon at the peak of the bubble when it traded at over $100 per share before dropping more than 90%, you would still be an extremely happy investor today with shares closing at $1,631.56 on February 22nd. However, with hundreds of cannabis-related companies on the market it will certainly be a challenge to find the Amazon of marijuana.

Acquisition frenzy could threaten investors. The M&A environment in the cannabis industry has become increasingly active as companies chase growth by acquiring capacity, diversification, and differentiation. While company managers may argue that these acquisitions are in the best interest of investors, with minimal revenues in this new space it is hard to say if the acquired unproven business models will be accretive to value. Notably, many of these acquisitions are exclusively stock-based. In fact, Bloomberg reported that 69% of all cannabis sector deals being financed entirely with stock compared to the 17% seen in the global M&A environment. The main reason for this share-based approach is that cannabis companies often have a difficult time raising cash for acquisitions via debt. The plant was only recently legalized recreationally in Canada and is still federally illegal in the US, so cannabis companies often run into barriers at banks that are slow to develop a legal pathway for corporate marijuana loans. As the total share count balloons out from under investors after each share-based deal, it may become difficult for these companies to generate a meaningful per-share profit for their investors.

Busted for not selling pot? As a brand new market with high levels of investor interest, the cannabis industry is particularly exposed to the risk of investment fraud. The SEC warns that scam artists may entice investors with false promises of low risk and high returns by issuing misleading or inaccurate statements about licenses or cultivation operations they don’t actually have. Ironically, this has led the SEC to take enforcement actions against companies for not growing weed. Hazy legal status in the US. While Canada and some US states may have legal recreational or medical marijuana, the use and possession of cannabis for any purpose is still illegal in the US under federal law. So, there’s still the risk that some of these companies could be criminally prosecuted if they take a misstep when navigating America’s contradictory legal status.

Hear from the experts. Although there is still so much we don’t know about the future of the cannabis industry, it is reasonable to expect growth, volatility, consolidation, and an overall wild ride. Get a glimpse into the future of cannabis and the immense opportunities that await by watching this Panel Presentation: Filmed live at NobleConXV, a distinguished panel of industry representatives, from all aspects of the business, break down the state of the business.

Sources:

Weed grower Canopy Growth rallies after legal pot sales buoy revenue by 282%, Thomas Franck, CNBC, February 15, 2019

AB InBev Enters The Cannabis Space, Tara Nurin, Forbes, December 19, 2018

Logistics Movers: Cannabis Firm Names Former Walmart Supply-Chain Executive as COO, Jennifer Smith, Wall Street Journal, October 9, 2018

Hemp legalization included in new farm bill could ‘open the floodgates’ on nascent industry, Jeff Daniels, CNBC, December 7, 2018

Canopy Investor Presentation, Canopy Growth Company, February 2019

Why pot companies are using their stock as currency of choice in M&A, David George-Cosh, BNN Bloomberg, November 2, 2018

This map shows every US state where pot is legal, Jeremy Berke and Skye Gould, Business Insider, January 4 2019

Corona beer maker Constellation ups bet on cannabis with $4 billion investment in Canopy Growth, CNBC, August 15 2018

Tobacco giant Imperial Brands invests in medical cannabis, BBC News, June 28, 2018

They worked at Amazon, Apple and Microsoft, and now they’re working to get you stoned, Tracey Lien, Los Angeles Times, July 22, 2018