Can you profit from the bubble in marijuana stocks?

Cannabis: a huge potential market

An email arrived in my inbox last night from a Canadian company that, to my knowledge, was in the business of exploring for minerals.

It is now “planning for new projects” in the medical marijuana sector.

It has even managed to acquire for itself the ticker symbol ‘BUD’.

This development is just one small puff in the latest bubble to come out of North America – medical marijuana.

Canada’s penchant for blowing bubbles

Canada is a fantastic country. It has brought many wonderful things to the world – maple syrup and Celine Dion, for example. But, boy, do they like blowing bubbles over there.

I don’t know if there is some crazy speculative urge in the psychology of the people, or, more likely, some flaw in the way its markets are regulated. But over the last seven or eight years we’ve seen speculative bubbles in uranium, rare earth metals, graphite, potash, lithium, zinc, nickel, moly, cobalt, silver, gold, grains, natural gas, biofuels and heaven knows what else.

Companies, usually fronted by a man with suspiciously white teeth and cufflinks, will sell you a story based on whatever is the flavour of the day – from peak oil and the looming energy crisis, to the growth of the Chinese middle class, to the coming collapse of the monetary system.

All of these stories contain an underlying truth, often one that is a little bit sexy. But that doesn’t mean that the company exploiting this story has any worth at all. It’s just wearing whatever frilly knickers happen to be trendy. That’s how bubbles form.

The latest in the long line is medical marijuana. And, if you ask me (and you don’t mind me mixing metaphors), this bubble has legs.

The advantage Canada’s marijuana companies have over the US

While the American states of Colorado and Washington have legalised marijuana, it is not legal across the rest of the country.

Canada has a different approach. A licensed company can now grow and ship medical marijuana to patients. However, it remains illegal for patients to grow their own.

These laws don’t vary from state to state, which makes Canadian companies much easier to sell to institutional investors – the legal position is clear, national and uniform.

Twelve companies have been granted licences by Health Canada, the government body overseeing the programme.  A year ago they couldn’t get a sniff of investment. Now they’re turning suitors away.

Take Tweed (TWD.V). With a story that will have some people sniggering, Tweed is building a “state of the art” facility for growing and harvesting marijuana out of an old chocolate factory. It’s right opposite the local police station.

It has raised over C$10m. Its latest placing was in early March at 89c. On its first day’s trading a fortnight ago, it opened at C$5.10 and was the third-most traded stock in Toronto. It then fell by 50%. It now sits at around C$3.35 and has a market cap of over C$100m.

Health Canada estimates that within the next decade, the medical pot market could grow to $1.3bn. How they have arrived at the figure I do not know, but a twelfth share of that might justify Tweed’s current market cap in the eyes of some.

Similar multi-bagger craziness has affected other marijuana stocks in 2014 – both in Canada and the US.

CannaVest (CANV), which is “in the business of investing and developing hemp-based cannabinoid companies”, has gone from $20 to over $200, and back to $20. Medical Marijuana (MJNA), which aims to be “the premier cannabis and hemp industry innovator”, has gone from 10c to 47c and now sits at 23c.

Tranzbyte Corp was up over 2,300% at one stage, GreenGro Technologies almost 900%. Do you really need me to go on?


Sign up for a 4-week FREE trial of MoneyWeek magazine

MoneyWeek magazine signup

"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd.


Yes, it’s a bubble – but there is a cracking story here

Most of these companies are so obviously never going to amount to anything, I can’t believe I’m even mentioning them. I’d be more inclined towards selling, rather than buying them. Many of them trade ‘over-the-counter’ (OTC) in the US on the ‘pink sheets’ – the Wild West of developed financial markets that should be avoided where possible.

Bubbles can pop at any time. But Canada – because of its federal legislation and its Venture exchange, which for some reason carries a veneer of respectability, compared to the pink sheets at least – is well positioned to take this bubble to new levels.

There is a great story here. Hemp has a huge variety of increasing uses – hemp seed foods, hemp oil, wax, resin, rope, cloth, pulp, paper, fuel. I’m actually wearing hemp socks, and very comfortable they are too. It also grows just about anywhere, under any conditions. Even a student can grow it. So ‘peak hemp’ is never going to be an issue.

There are already lots of medicinal uses for marijuana – and these are bound to increase. So, there’s all the appeal of some transformative new tech. And the fact that it has been illegal for so long (which means there is a lot of research catching up to do) makes the story that much more of a sexy sell.

It’s all just what a good bubble needs.

And of course, the critical moment is yet to come. What every potential investor is really waiting for is when marijuana is made universally legal. With Washington and Colorado already there, that moment must be getting closer and closer.

Marijuana is to drugs what beer is to alcohol. That’s where the huge potential market is. Those companies already operating in the sector when that day comes will have huge first-mover advantage. They will already have the infrastructure in place for the moment when recreational use of marijuana is made legal.

So yes, most of the companies in this sector will probably amount to nothing. You should avoid them religiously. But fortunes are going to be made (and lost) here. I’m not going to tip OTC stocks, nor am I going to recommend Tweed at this stage. But the conscientious speculator should be watching this sector and researching opportunities with his or her eyes wide open.

This is a bubble that is going to get a lot bigger. And as soon as I find a way to play it that I’m happy with, you’ll be the first to know.

• Dominic Frisby’s latest book, Bitcoin – the Future of Money will be available soon. His first book, Life After The State, is available at Amazon. An audiobook version is available here.

This article is taken from our FREE daily investment email Money Morning.
Receive our thought-provoking investment email every weekday morning plus occasional promotions & become a smarter investor.

Please enter a valid email address

To sign-up enter your email address.




• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

Our recommended articles for today

Invest in the rise of alternative finance

SUBSCRIBERS ONLY

Peer-to-peer lending firms are increasingly disrupting traditional banking. John Stepek looks at how to profit from this alternative finance revolution.

Don’t get blindsided by a profit warning

Markets often overreact to profit warnings. For investors in big companies, it may mean a chance to pick up shares on the cheap. But for small-cap firms, it’s a very different story, says David Thornton.

Comment on this article

MoneyWeek magazine

Latest issue:

Magazine cover
Hard cash

What's next for gold and silver?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

FREE REPORT:
What you should really do with your money (2014 Edition)


How to buy and sell penny shares

A beginner's guide to investing in gold

How to invest in British fracking