UNITED STATES - With pot now legal in two states for the past year,and decriminalized, conditionally legal, or medically prescribed in many more, ganja startups are gaining traction — and the growth potential is huge, if other states legalize. So far this year, pot stocks are up 147%, handily beating the S&P’s more modest gains, according to consulting and financial services firm Viridian Capital & Research. Which companies are doing well? Viridian has created a cannabis industry report that tracks the progress of publicly traded companies in the emerging sector. For now, they’re all trading over-the-counter, but watch for that to change.
It’s a Wild West atmosphere in the sector, given that the product is still, ahem, mostly illegal. A few pot companies were forced to cease trading in recent months, and the Financial Industry Regulatory Authority (FINRA) continues to actively discourage investors from putting money into cannabis stocks. Some pot startups lack professional management, a board of directors, or proper financial controls, Viridian notes — so due diligence is important.
Despite all the reasons to avoid pot stocks, some cannabis companies are impressing investors. Viridian categorizes publicly traded the companies into ten business types. Three are off to a slow start this year — cannabis-related real estate, security services, and software — while the rest have seen at least one company’s stock double in value or more.
The hottest area right now is, unsurprisingly, consulting (up 665% sectorwide through the third quarter of 2014). No doubt plenty of businesses want advice on how to get into this line of work. In second place is cannabis-related biotechnology (up 339%).
It’s no surprise that several of the hot stocks out of the gate aren’t startups, but established businesses switching their focus into cannabis. Investors do love a track record. Which companies had the best stock returns in the first three quarters of 2014? Here’s a rundown, with top performers listed first (full disclosure: I do not trade any over-the-counter stocks):
1. Novus Acquisition & Development (+3,100%) — This red-hot, Miami-based consulting company provides a medical cost-savings plan for people who’d like to receive alternative medical treatment — namely, cannabis. For less than $20 a month, subscribers receive steep discounts on the cost of their prescribed weed. Last month, Novus rolled out its Medplan benefits network to states where medical pot is legal, and hired another sector startup, organic grower TKO Organics, to grow and dispense its patients’ ganja in seven states.
2. Abattis Bioceuticals Corp. (+1,600%) — Hailing from Vancouver, B.C., Abattis provides cultivation systems, extraction equipment, and consulting services to growers. The company raised $3 million in private placements this year, and went on an acquisition spree. Abattis snapped up fertilizer formulas from one company, a majority interest in marijuana testing-lab Phytalytics, and a one-third stake in a payments company. Last month, though, Abattis filed suit against former Phytalytics executives, whom it alleges formed a rival company.
3. United Cannabis Corp. (+1,025%) — This cannabis consulting and product-making firm has been providing consulting to medical marijuana companies since California first allowed prescribed pot in 1999. United is seeking to patent a super-strong marijuana pill it’s developed. The Denver-based firm even snagged a consulting gig last month for Jamaican government officials contemplating decriminalization moves. (Who knew it wasn’t legal already?)
4. Cannabis Sativa Inc. (+969%) — Products maker Cannabis Sativa recently bought pot research and development firm Kush and named former two-term New Mexico governor Gary Johnson president and CEO of the merged company. Johnson, a sometime Libertarian party presidential candidate, is joined by chairman Steve Kubby, who’s been a Libertarian candidate for governor of California.
Cannabis Sativa markets its wares under the name “hi,” starting with its hi lozenges. Bet a lot of other pot startups will be wishing they grabbed that branding first, or their snappy slogan: “products of higher consciousness.”
5. mCig, Inc. (+244%) — Seattle-area herbal cigarette and vaporizing-device maker mCig is adapting its pocket-sized technology for marijuana use. These devices have the advantage of allowing users to inhale the vaporized product, rather than lung-damaging smoke.
6. Greengro Technologies (+225%) — In March, retailer Greengro of Anaheim, Calif., raised $875,000 in a private placement. The company acquired retailer Vertical Hydrogarden and reopened the store in March, as the first in a planned franchise chain. Greengro is also doing a multi-stage purchase of a construction company, for future expansion. As in most product industries, the retail side is huge — this is the biggest sector in Veridian’s marijuana-stock index.
7. TerraTech Corp. (+157%) — This established Irvine, Calif.-based grower and retailer is moving into marijuana cultivation, and had the biggest fundraising of any public company in the sector, closing a $6.5 million debt facility in February. TerraTech is developing a research and cannabis extraction facility aimed at the medical marijuana market. The company is also collaborating with vaporizer firm Vaporin to create cannabis-product vending machines for the medical market.
8. Mentor Capital, Inc. (+155%) — Silicon-Valley investment firm Mentor dates to 1985, but now it’s moving out of cancer cures and into marijuana in a big way, with a $23 million fund. The company buys substantial stakes in cannabis companies, such as the $2 million in funding that went to industry marketing and research firm The Cannabis Advocacy Machine in June. Mentor also provided $100,000 in seed funding for Nevada Cannabis Ventures, which aims to be a first-mover in that state.
On the down side, Mentor last month filed suit against one marijuana edibles company, Bhang Chocolates, for the return of $1.5 million. No doubt there’s massive consolidation ahead in all these varied sectors of the cannabis economy, as startups scramble for their piece of what is so far a modest-sized market. But if states continue to legalize and decriminalize, these early movers in the space are well-positioned to flourish.
It’s not often that an entirely new industry emerges in the U.S. economy, so some investors are clearly willing to gamble that they might pick a big winner in the pot sweeptstakes.
Forbes Magazine/Nov. 14, 2014