Marijuana enthusiasts around the world are celebrating 4/20, a code-term that refers to cannabis consumption, and one’s ‘membership’ in the cannabis sub-culture. 4:20 is actually the time of day a group called the “Waldos” would meet outside of a California school in 1971, to go in search of a cannabis field they learned about. The Waldo’s never found the field. An article in the High Times magazine, however, and a little attention from the band the Grateful Dead sent the term viral.
Some marijuana stocks have gone ‘viral’ on Wall Street as well. Novus Acquisition and Development, (stock symbol: NDEV), provides health insurance and medical plans for Hemp patients. It’s stock, which trades in the lightly regulated over-the-counter market like many marijuana companies, was up 1,133% in in 2014. Cannabis Sativa, a biotechnology company that is in engaged in research and development was up 820% last year, and biotech licensing company, Abattis Bioceuticals, had a gain of 525% for the same period. The gains in these stocks, and others in the sector, were largely driven by actions taken by states to legalize marijuana for medical and recreational use, as well as widespread media coverage of what looks like a cultural shift in attitudes about the plant.
For every high flying stock, however, there are a barrage of stories about companies that have failed in this alluring sector. The promise and peril of cannabis stocks can make investors feel like they are searching for a diamond in the rough.
BE.com spoke to Scott Grieper, president and founding partner of Viridian Capital & Research. Viridian is a specialized boutique banking and strategic advisory firm that provides research, investment banking, investor relations and corporate development services to emerging growth companies in the cannabis sector.
Grieper said when it comes to investing in marijuana companies, many of the same rules should be applied to investment decisions about any company.
BE.com: How do you evaluate companies that you will work with?
Greiper: We start by taking a close look at 2 risk areas: The first is management: These are usually small companies that do not have seasoned executives in place. You may have guys with good ideas, but you normally don’t have people who have true expertise in growing a company. The literal DNA of this sector is that you have folks who have been growing in their back yard, in some instances even selling. Very different skills are needed, however to start a business, attract capital, and go public. The other is whether a company is prepared to compete against established players. Once you pass the million dollar mark in revenues, you’re causing a disruption in the market. At some point, your competitors are going to get aggressive. They may offer the same product at a cheaper price, they may come up with a better solution, or they may whisper in customer’s ears about your ability to grow. Most important, does the CEO have the maturity to know when he needs help? We work with companies who are willing to allow us to add real governing expertise by appointing board members and other areas of infrastructure that will give the company credibility with investors.
BE.com: There are many different sectors in the cannabis industry. From an investment stand point, the top performers have been: The consulting service sector, which capitalizes on the need for licensing, facilities, etc.; the biotechnology sector, with companies that try to capitalize on the anticipated growth of cannabis pharmaceutical products; and the infused products and extracts sector, which focuses on cannabis related products like edibles and extracts. How does an individual investor decide which companies and sectors are worth a try?
Greiper: The cannabis opportunity is fast-growing and global. Still, investors shouldn’t romanticize the possibilities. They need to make sure and do their homework. These companies file 10-K reports with the SEC, which describe management. They file 10-Q reports that can help you evaluate performance. This information is public domain. Technology has made it easier than ever to find out information and news about a company or a sector.
Greiper says you also want to look at things like who were the early investors in the company. There has been more than one example of less than savory characters that have been embedded in the early stages, and that’s caused problems. You can also download Viridian’s industry report which has detailed analysis and information about the different sectors and companies that are at the forefront of this brave new world in investing.