What Are the Risks of Investing in Marijuana Stocks?

As attitudes toward cannabis change, new opportunities for investors looking to diversify their portfolios appear. However, as with any type of investment, risks to investing in marijuana growers, distributors or others in this space loom. Let’s look at some of those risks and how they could impact your ROI.

Marijuana Is Illegal in the United States

Those looking to invest in American marijuana stocks should know that possessing and selling it is illegal at the federal level. Therefore, banks and other financial institutions will generally not lend to such businesses. This can make it harder for companies to grow, and it could also leave the cash that a business has earned vulnerable to being stolen.

Since marijuana is illegal at the federal level, the government could prosecute anyone found with it in states where it is legal to possess or use. While the Rohrabacher–Farr amendment provides some protection to residents of states where marijuana has been legalized, there is no guarantee that it will remain in place.

It Can Be Hard to Accurately Value Marijuana Stocks

Even if you are not worried about the legality of marijuana where you live, it is still important to purchase stocks at a fair value. If a stock is deemed to be expensive, it could limit its upward growth in the short-term. Investors should also know that companies that do business in the United States may face limited growth regardless of where they are based.

Right now, marijuana stocks have appreciated in price based more on speculation as opposed to earnings growth or other strong fundamentals. Therefore, it is possible that some stocks could be in line for a correction at some point, which could make them risky plays at the moment.

Dilution Could Be a Concern

Since marijuana companies have limited access to the capital markets, they may have to raise funds by issuing shares of stock. However, this may increase the risk of diluting a company’s share price. Although dilution can happen in any industry, it is more likely in an industry that has few options to raise large sums of money quickly.

While investing in marijuana can be an interesting way to boost the value of your portfolio, it is important to choose stocks wisely. If you need help, a financial adviser or other professional may be able to help you evaluate your options. From there, you can make choices based on your timeline and risk tolerance.

—Jacques Piccard, Managing Director of Davenport Laroche Shipping Container and Alternative Investments