Things have started to turn around for the cannabis market since the 2014 pot bubble, but it can still be difficult for investors to know how to find the best cannabis stocks to invest in.
For starters, marijuana isn’t yet legal for recreational use in Canada and in many states across the US. Furthermore, a number of states and provinces are looking at legalization for both medical and recreational marijuana use, making it difficult to keep track of what licensing requirements to look for when doing one’s due diligence.
To help investors and market watchers find the best cannabis stocks to invest in, former Wall Street attorney Chris Milenkevich started Gotham Cannabis Associates, a firm that specializes in due diligence on publicly traded cannabis companies. After 11 years as an attorney with Cadwalader, Wickersham & Taft LLP, Milenkevich started looking at whether he might be able to apply his skills in a different environment, and the cannabis industry looked like the place to be.
“The cannabis industry is obviously a very new industry and one that was very exciting,” he said. “It’s very rare that you have a brand new industry arise.”
However, he also noted that the cannabis industry is currently characterized by a lack of information, despite there being no shortage of people looking to get involved in the space. “I really realized there was just such a need for quality, sophisticated diligence of the kind that I was used to doing for so many years Wall Street,” he said.
Certainly, Milenkevich has a stronger grasp of the legal landscape in relation to cannabis than most, making his insight extremely helpful when conducting due diligence on cannabis companies. The Investing News Network spoke with him about what investors should keep an eye out for when looking for the best cannabis stocks to invest in.
Legal considerations: Can the best cannabis stocks to invest in cross state lines?
As mentioned above, cannabis is legal in 24 states in the US, but it is not legal at the federal level. That can lead to some complicated legal issues.
For example, Milenkevich pointed out that cannabis companies cannot use water from a federal aquifer. “If they’re drawing water to use in their cultivation, or to use in their extracting processes, and the water they’re using comes from a federally owned aquifer, they could actually get into a lot of trouble,” he explained.
“There are cannabis companies out there who have realized this is an issue, and they now have to contract private supply water companies to make sure they don’t run into a ton of mess.”
Another, perhaps more interesting point, is that cannabis companies cannot file for federal bankruptcy protection, which Milenkevich says is something that most investors don’t realize at all. “Bankruptcy in the United States is largely a matter of federal jurisdiction and bankruptcy court has rejected cases filed by cannabis companies,” he stated.
Finally, though you might find one of the best cannabis stocks to invest in in Washington, Oregon or Colorado, it’s worth keeping in mind that those companies cannot cross state lines. That makes it difficult to scale and grow a company effectively.
“People get very excited the idea of building a nationwide empire, forgetting that you can’t manufacture a cannabis product in one state and start selling it in another state,” Milenkevich said. For example, a growing cannabis company couldn’t simply expand its operations in Oregon and ship product to Washington.
Would legalization at the federal level be a game changer?
Certainly, there are plenty of challenges due to the fact that cannabis use hasn’t yet been legalized at the federal level. However, Milenkevich was hesitant that federal cannabis legalization would solve all of the industry’s problems.
“If it was legalized on the federal level it would certainly make life a lot easier for cannabis companies and therefore for investors,” he said, “but it’s not a panacea. There are still tons of state restrictions, and regulations vary greatly from state to state.”
For example, advertising rules for cannabis companies differ from state to state, making it difficult to launch a nationwide advertising campaign. Lifting the federal prohibition on marijuana wouldn’t change restrictions at the state and local level.
Will federal legalization ever happen?
For his part, Milenkevich believes that federal cannabis legalization will happen eventually, but that it won’t be anytime soon.
“I think it’s ultimately an inevitability, but there are a lot of people who are acting like it’s going to happen at the end of this year,” he said, “ and I don’t think there is enough [to back that up].There are still a lot of people who are wary of the products and wary of the social implications.”
For example, he noted that legalization efforts in New England have been hitting obstacles to cannabis legalization due to concerns over an opioid epidemic currently taking place. Overall, he thinks that legalization will happen within the next ten years, but he wouldn’t be confident capping that prediction at five years.
That being said, the outcome of the US federal election could lead to changes in the cannabis industry. The New York Times noted that California, together with four other states, may vote in favor of recreational cannabis.
If California, in particular, voted yes–which has a sizable economy–it would be hugely influential in the federal legalization of cannabis.
What should US cannabis investors look for?
For now, investors looking for the best cannabis stocks to invest in will have to conduct their due diligence carefully. Here are a few things Milenkevich says investors should look for:
Licensing; “You need to make sure that the company has every license that it needs, from every jurisdiction that it needs, and that could be state, county and local,” he said. Just because a company has a state license, doesn’t necessarily mean it’s up to snuff for a specific county, and investors should pay attention.
Staying in line; Milenkevich stated that there are over 600 pages of regulations in Colorado alone. “They cover everything, from literally, what kind of font you can use on your packaging to whether or not the car that you are using to transport your products must be registered in Colorado or not,” he said. The best cannabis stocks to invest in will be aware of and compliant with all relevant regulations.
Cash considerations; It’s sometimes said that cash is king, but for US cannabis companies, cash is a whole different issue. “Another result of the federal prohibition is that there are very, very few banks that are willing to work with the cannabis industry or credit card companies, because there’s a very real [risk] that they will be shut out of the federal banking system, if the federal government finds that they are … processing money for illegal operations,” he said. “A lot of cannabis companies are dealing entirely with cash. So, if you’re an investor, you need to think about how that is working, how is the cannabis company dealing with these, literally, bags of money.”
Community relationships; Finally, Milenkevich stressed that it’s essential for cannabis companies to have a good relationship with their local communities, both in terms of corporate citizenship, and for liability reasons. “If you don’t have a good relationship with local authorities, they’re going to be looking for reasons to shut you down,” he said. “And when there are 600 pages of regulations, it’s not that hard to find a reason, no matter how careful you are.”
That’s a lot to consider, and some of that information may be difficult to come by. However, Milenkevich stated that by finding people who know the company, asking the right questions and making sure to get accurate industry intelligence, cannabis investors will be well on their way to finding the best cannabis stocks to invest in.
Cannabis companies
Milenkevich couldn’t mention any cannabis companies that Gotham has done due diligence on thus far for confidentiality reasons.
However, there’s no shortage of cannabis companies out there for interested investors to start looking in to. For a start, here are a few examples of cannabis companies that Alan Brochstein mentioned he’s keeping an eye on in a recent interview:
Indoor Harvest (OTCMKTS:INQD)
MassRoots (OTCMKTS:MSRT)
Medicine Man Technologies (OTCBB:MDCL)
And for those north of the border, there are plenty of Canadian cannabis stocks to check out as well, such as:
Canopy Growth (TSXV:CGC)
Naturally Splendid (TSXV:NSP)
Mettrum Health (TSXV:MT)
Wherever you’re looking, always be sure to keep Milenkevich’s points in mind, and to do your own due diligence.
