Let's take a pause from the high drama of Donald Trump and politics to recognize that Nov. 8 was also a watershed moment in the decades-long campaign to legalize cannabis.
Voters approved measures legalizing the adult use of cannabis in four states, including California. Medicinal use of cannabis was approved in three additional states and expanded in one other.
Not only does this represent a political sea change, but it will be an important catalyst to the fastest-growing industry in the U.S.: legal cannabis. Already many are starting to realize that moving an industry estimated to be worth tens of billions from the black market to a legal, regulated one may create one of the bigger investment opportunities of our lifetime.
The overall market in the four states and the District of Columbia, where cannabis was already legal, is roughly 18 million people. Adding California, Nevada, Massachusetts and Maine, where opponents may seek a recount, will more than triple the market.
For investors who want to capture some of the industry's rapid financial growth, but don't want to get involved with plant-touching firms that grow or sell cannabis and products still prohibited under federal law, lots of opportunities exist.
And it is a sizeable market: Legal cannabis sales in the U.S. jumped 17% to $5.4 billion in 2015, and are expected to grow by 25% this year, to $6.7 billion, according to ArcView Market Research. Investment bank Cowen and Co. predicts that within 10 years, sales will hit $50 billion in the U.S.
Having worked in this nascent industry for over six years, first as a grower and now growing a company focused on acquiring and building cannabis-related businesses, I've had a first-row seat to the show, and I welcome the expanding cast of characters. We all want the same thing: wealth, as cannabis becomes legal in more states.
But making a legal profit from cannabis and investing in companies that supply products to the new industry requires research and staying on top of legal developments. It's true the federal government, under President Obama, has said it would not deploy its resources to prosecute people using cannabis and complying with state laws. It's also true that, culturally, states and their millennial voters are trending toward legalization. And the win for legalization at the polls will pressure the federal government to reassess its almost 80-year prohibition of the plant.
Still, it remains unclear under what circumstances the federal government would remove cannabis from the list of Schedule 1 controlled substances. President-elect Trump has supported medicinal legalization and indicated support for states' rights to set their own rules on adult use.
In the meantime, until there is more clarity about federal cannabis laws, the investible opportunities are bifurcated into those that touch the plant — which are riskier — and those that do not, including all the suppliers in the legal cannabis market.
Even now, with years of legalization in Colorado, Oregon, Washington, Alaska and the District of Columbia, investment can be risky. Businesses that work most closely with the product — who "touch the plant" in industry lingo — have trouble banking their earnings and are disallowed common tax deductions due to the discrepancy between federal and state laws, increasing their tax burden and creating increased risks of theft and other crimes against the businesses and their employees. Moreover, many cannabis companies are owned by individuals or backed with private equity and offer little or no public disclosure of their finances.
Accredited investors, who can access private equity and venture capital, may want to consider cannabis-related funds, such as Seattle-based Privateer Holdings, which recently paid the Bob Marley family to use the singer's name on a line of products, or investment managers, such as MedMen, a cannabis consultant in Los Angeles that recently opened the MedMen Opportunity Fund.
For investors who want to capture some of the industry's rapid financial growth, but don't want to get involved with plant-touching firms that grow or sell cannabis and products still prohibited under federal law, lots of opportunities exist. Real estate investment trusts, equipment companies, and gardening-equipment and soil companies, are all potential plays.
One of the largest companies in the don't-touch-the-plant category is the New York Stock Exchange-traded Scotts Miracle-Gro SMG, +0.81% which has been acquiring hydroponics companies as a means of accessing the legal cannabis sector. Its stock has surged this year as a diversified cannabis play. Reynolds American RAI, +0.78% has positioned itself as a leader in vaping technology, although some investors may want to avoid the big tobacco giant on account of its core business.
For investors interested in cannabis pure-plays, there is a burgeoning group of public cannabis stocks to choose from, including many non-leaf-touching companies that provide services to leaf-touching companies. Much like sellers of shovels to miners during the Gold Rush, some of these firms will do well during the current "Green Rush" without the cost and risks associated with federal prohibition. In fact, until last month, stock prices for many cannabis-focused products tracked by The Marijuana Index traded below their offering prices. In the past month, however, that index rose above its Jan. 15, 100-point inception level, and since early October, the index gained more than 50% leading up to Election Day.
As you look at stocks to buy, investigate to see if they include grow operations, genetics (seeds, for instance), real estate where the land is being used for growing, or dispensaries. These plant-touching companies will carry a higher risk of banking problems and federal criminal charges or asset forfeiture. If you are still wary of the illegality of the plant-touching part of the industry, focus on finding companies that supply the industry with equipment and services but don't touch the plant themselves and don't have trouble accessing banking, or taking standard business deductions.
Of course, as with any investment, do the research and be patient for returns. This field will take time to mature.
Jeff Beverly is president of Grow Solutions Holdings Inc. GRSO, +6.98% a non-leaf-touching cannabis firm that invests in cannabis-related verticals, including cannabis-garden suppliers and a cannabis job-placement website. Jeff's article originally appeared on MarketWatch and has been republished with permission.