Never mind weed’s ambiguous legal status, the 420 stock market is soaring.
In 2016, the cannabis stock index grew 236 percent, according to Viridian Capital Advisors, a financial advisory firm for the cannabis industry. About a year ago, Viridian developed a Cannabis Stock Index to track the 50 publicly traded cannabis companies. The index includes 12 product and technology sectors, with special attention to businesses that touch the marijuana plant (like growers or dispensaries) and other ancillary businesses that don’t (consulting companies, tech companies, and so on).
“Cannabis stocks are on fire right now,” Alan Brochstein, founder of 420 Investor, tells Jane Street. Efforts from stock promoters, newsletters and media, enthusiasm around nationwide legalization trends, and fear of missing out on “the opportunity of a lifetime” all feed into the investor mentality, he says.
“I think that it’s definitely easier for ancillary companies to attract capital,” Brochstein adds. Cannabis cultivation, on the other hand, is less attractive to investors. “Growing cannabis in scale and economically is not something everyone will succeed at,” he says. “You will have a few winners and a lot of losers.”
Cultivation is only one of the dozen categories laid out in the Cannabis Stock Index. Viridian’s 12 categories include agriculture technology, biotech/pharma, consulting, consumption devices, cultivation and retail, hemp, investments/holding companies, infused products/extracts, physical security, real estate, software/media, and other miscellaneous ancillary businesses.
To be included in Viridian’s Cannabis Stock Index, the cannabis and ancillary companies must meet certain criteria: $10 million market capitalization (the value of the company when it’s traded on the stock market), minimum $20,000 average daily trading volume (the number of individual securities, also known as investments, traded over a certain period of time), at least a quarter of their shares outstanding (available to be traded), and that their financial reports be filed on time for a least the past six months.
Among the stocks tracked by Viridian’s index are GW Pharmaceuticals and Zynerba Pharmaceuticals, which develop cannabinoid treatments from synthetic cannabinoids (the chemicals in cannabis) or from the actual plant material.
Currently only one marijuana business is listed on the New York Stock Exchange: Innovative Industrial Properties, a real estate investment trust company targeting medical cannabis facilities for acquisition and sale-leaseback transactions. In other words, they rent out properties to people who grow and store pot.
The purpose of the Cannabis Stock Index is to not only help Viridian recommend specific stocks, but also to shed some light on which sectors of the cannabis industry attract the most investment capital, according to Scott Greiper, Viridian founder and president.
According to Viridian’s data, some of the best performing stock sectors in the cannabis industry included consulting services, biotech/pharma, and cultivation and retail, which went up 737.3 percent, 482.3 percent, and 287 percent respectively. Meanwhile, the worst performers were real estate, infused products and extracts, and software/media.
However, notes Taylor West, deputy director of the National Cannabis Industry Association, most cannabis companies are privately funded. Viridian’s index only incorporates a small portion of the entire industry.
While there’s been some volatility in the stocks since around October, Harrison Phillips, an analyst at Viridian, notes that even the latest lows have been subsequently higher than the lows that preceded them, which is overall a good sign.
After the election hype subsides, according to Phillips, the volatility should level out. With increasing interest in the cannabis space, following the passage of eight adult use or medical legalization initiatives in November, people will be able to make more informed decisions about where to trade and invest.
“I’m hoping people will be more sane and not treat the market like a casino, which seems to be going on right now,” says Brochstein. Attorney General Jeff Sessions, however, poses another threat to the industry. Having been critical of Obama’s administration for not enforcing federal prohibition in green states, Sessions could crack down on state-legal cannabis businesses. While many investors don’t follow Sessions’ every move, those who are more sophisticated might invest in real estate or management services, rather than in cannabis licensing, adds Brochstein.
“But until something happens [at the federal level], it doesn’t matter,” he says. “I could sit here until I’m blue in the face and tell people to be cautious, but it doesn’t matter.” If the cannabis industry gets lucky, Sessions will focus his efforts elsewhere, allowing the status quo to proceed.