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Is the trend of increasing state legalization of cannabis, commonly known as marijuana, making it the investment flavor of the day, or something that should be part of an investment portfolio? There are many issues surrounding legalization of recreational and medical use of marijuana. Pot is still federally illegal to grow and transport across state lines, which makes traditional banking and financial services more difficult until these rules are eased; and the long-term health impact of habitual use is unknown. These basic issues have yet to be addressed.

Publicly traded cannabis companies do exist, (Auroroa, Canopy, Tilray). These stocks have very little history and trade with very high volatility. In addition to the risky trading activity of the stocks, none of the players are currently profitable and it is unclear when they will be. Furthermore, it is difficult to assess the potential growth of the industry and the eventual leaders. We deem them too risky as investments for all but those with incredibly long time horizons or for short term speculative trading. Large consumer products and drug companies have invested in public and private cannabis companies through joint ventures or large equity positions. Companies like Coca Cola, Inbev (Budweiser), Philip Morris (Marlboro cigarettes) and Constellation brands (Corona beer), with their very deep pockets, are positioning themselves to be in this market with their powerful consumer and distribution presence. Cannabis is being consumed via edibles, smoking, vaping, and potentially in liquid form; hence, the beverage companies’ interest. One obvious question that emerges is: How do you control the dosing and consumption rate for edibles like marijuana gummies or beverages? Also, legalization is occurring at the state level, likely in pursuit of tax revenues, but there is no guarantee of those revenues materializing. In states with high tax rates on the purchase of pot products, a large black market has emerged and resulted in lower than expected tax receipts and oversupply conditions. On a societal note, pot seems to have become more socially acceptable to use in private, however, the acceptance of public consumption, especially by people with children, is a significant issue.

In summary, while the move toward legalization of medical and recreational marijuana will likely continue, it is still very early and there are many unknowns. Until federal legalization occurs, it will be difficult for cannabis companies to turn a profit as they will potentially need to comply with many regulatory regimes, tax structures and distribution methodologies. Federal legalization of recreational marijuana is unlikely to occur during the current administration, but may very well occur during the next democratic administration, as decriminalization of marijuana within progressive circles is an important policy initiative. As one manager noted, “there are still too many ‘ifs’ and ‘whens’,“ making the space still highly speculative. We agree, and are content to sit on the sidelines and watch things play out.

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Guest Sunday, 23 February 2020