The Marijuana Industry Is Growing Like Weeds

Whatever you want to call it – pot, weed, ganja, grass – more and more investors are growing curious about marijuana’s future and related investment opportunities. Indeed, the industry has progressed to the point where the medical use of marijuana is gaining greater acceptance.

Within the last six years ago, the number of Americans who support legalizing medical marijuana has risen from 70 to 90 percent according to polls by Quinnipiac and Gallup. Those who support overall legalization has risen from 46 percent to 54 percent.

Let’s explore some of the recent news and changes to the marijuana industry that could impact the industry’s growth and accessibility for investors.

State legalization of medical marijuana

Twenty-five states and Washington D.C. now have medical marijuana laws in place. Florida, Missouri and Arkansas could join them later this year when voters place their ballots in the November elections.

Last month, Ohio became the most recent state to legalize medical use of marijuana. Although the new laws are a large step forward for the state, some supporters are disappointed Ohio wasn’t more lenient in its rulings. Ohio’s laws are more restrictive than many other states.

Ohio and Pennsylvania are the two most recent states to legalize medical marijuana. Source: The Washington Post

Now, roughly 175 million Americans – or more than 50 percent of the US population – have access to medical marijuana. This leaves many wondering why the federal government continues to classify marijuana as a Schedule 1 drug, the same substance category as heroin, LSD and ecstasy. The DEA describes Schedule 1 drugs as the most dangerous with “no currently accepted medical use and a high potential for abuse.”

The DEA was supposed to announce by June 30th whether or not they would drop marijuana into a lower category, but they missed the deadline and have not announced when or if a decision to reclassify marijuana is still in store. Even if the DEA lowers marijuana one level to Schedule 2, it would remain a highly controlled drug. Some of the current Schedule 2 drugs include cocaine, oxycodone, opium, morphine and many other narcotics. The DEA has a total of five schedules of controlled substances.

So how are states able to allow eligible businesses and people and to grow, sell and consume marijuana? The Obama administration’s general stance is that states can follow their individual marijuana laws without federal interference as long as they can police their use. Both Hillary Clinton and Donald Trump have said they plan to follow this same approach.

Recreational use and growth expansion

In addition to legalized medical use, four states – Alaska, Colorado, Oregon and Washington – also allow its citizens to use marijuana recreationally. California could join them later this year if voters pass a ballot initiative this November that is modeled after Colorado and Washington state. California was the first state to pass medical marijuana use in 1996 and advocates are hopeful the ballot will pass. Four other states are also voting on recreational use in November: Arizona, Nevada, Maine and Massachusetts.

California is already the world’s eighth-largest economy with an annual GDP above $800 billion and 39+ million residents. The Golden State’s legal medical use currently generates about $2.7 billion out of the total industry’s $5.7 billion market. If the November recreational use ballot passes, it’s estimated an additional $1.4 billion could be generated for California in its first year. That figure could grow to $6.6 billion by 2020 according to Troy Dayton, chief executive of cannabis research firm The ArcView Group.

As for the overall U.S. marijuana market, total legal sales are forecast to exceed $22 billion by 2020. Just to put that number in perspective: Dun and Bradstreet has information on more than 240 million businesses in its database and by Fortune’s estimates, fewer than 130 companies make more than $22 billion annually.

Legal cannabis sales are projected to grow about 25 percent in 2016 to $7.1 billion. Source: Forbes

Ancillary businesses such as testing facilities that support the infrastructure of the industry are expected to drive a lot of the growth. Laboratories and analytics companies such as Steep Hill Labs are becoming more important in states like California. These businesses work with cultivators and manufacturers to verify products meet the safety and potency requirements of each state and the quality consumers expect.

Additional industry changes

Since states that have legalized marijuana have strict advertising regulations, advocates and cannabis businesses haven’t been able to market the health benefits of marijuana to the public. Recently, the industry managed to help raise awareness by seeking support from former professional athletes. Former NFL and NHL players, including keynote speaker Leonard Marshall who played for the New York Giants, attended last month’s Cannabis World Congress & Business Exposition. Many athletes use medical marijuana for pain management and other conditions such as headaches, depression, short-term memory loss and sensitivity to light.

Last month, Microsoft Corporation MSFT announced a new partnership with KIND Financial that will provide software to local and state governments for tracking cannabis distribution and sales. Their efforts are hoped to prevent marijuana reaching the black market. New York’s Department of Health also announced they are using Oracle Corporation ORCL software to monitor their medical marijuana program.

Venture capital firms are also becoming more active in the industry. Founders Fund, co-founded by Peter Thiel, invested an undisclosed amount into Privateer Holdings last year, a private-equity firm that focuses on marijuana. In addition, incubator Y Combinator selected two cannabis related technology start-ups last year for $120,000 seed rounds: Meadow, a software company for dispensaries and delivery services and Confident Cannabis, a software company for testing labs.

MedMen, a leading cannabis management firm, recently launched a $100 million investment fund as well. The MedMen Opportunity Fund, L.P.’s strategy will be focused on investing in markets with high barriers to entry that are supply constrained.

Ways to gain exposure

Much of the marijuana industry is still restricted to private equity funds or over-the-counter stocks but this could change as legalization increases and more publicly listed companies like Microsoft become involved.

The easiest way serious investors can gain exposure at the moment is through ancillary businesses that don’t actually grow or sell marijuana. Instead, these businesses provide services such as:

• Security
• Lighting
• Facility development
• Consulting
• Delivery

Cannabis consulting business Medicine Man Technologies Inc MDCL is one such company that started trading over the counter earlier this year. Terra Tech Corp TRTC, Insys Therapeutics Inc INSY and GW Pharmaceuticals plc GWPH are two other companies that investors can access.

Note that there are still risks involved with investing in the marijuana industry. The SEC has warned investors about potential fraud and some attorneys believe it is technically illegal to invest in marijuana-related stocks despite what is believed the relative low risk of jail time. David Feldman, a partner from law firm Duane Morris, which specializes in the industry told US News that in regards to investors, “it would be extremely remote to imagine any authority coming in” and making arrests.

Investors who are comfortable with the industry risks may find the best opportunities within biotech, software, cultivation, real estate and infused products. You may also want to review the community motifs based on the cannabis theme.

Has your state legalized marijuana?

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