Is the Cannabis Market Ready to Fly High?

With marijuana’s inexorable crawl towards nationwide legalization, financial advisors might want to take a closer look at the growing cannabis market.

That’s especially so with seven states (including California) voting to legalize all pot use this November, and a handful more moving to expanded medical marijuana use. Given the almost unbridled growth of the market, is it time to look at marijuana as a strong investment portfolio asset?

Let’s take a look at the numbers. According to the ArcView Group, a San Francisco-based cannabis investment research firm, the legal market for the once-forbidden industry could reach $22 billion in revenue by 2020, representing over $16 billion in revenue growth over a five year period.

The same report says public opinion is more favorable towards legal cannabis usage, a trend that could see more states green-lighting legal marijuana consumption going forward.

Right now, market performance seems muted, and even disjointed, experts say.

“In Washington and Colorado, after the initial green rush, recreational marijuana settled down to be a pretty ordinary business with very ordinary ROI, if that,” said Jay Currie, author of the book, Start & Run a Marijuana Dispensary or Pot Shop.

Currie says if there’s any money to be made by investors right now, it’s in the “well-capitalized seed-to-sale operations, which can control their cost of sales and absorb low margins until the IRS and Congress allows normal course business deductions.”

Currie brings up another good point. Even though the U.S. is looking at an increase in state-level legalization, marijuana is still illegal as far as the IRS is concerned.

That’s a problem for both growers and retailers, because federal law won’t allow businesses to deduct expenses that stem from illegal drug trafficking, Currie said. He doesn’t think that will change any time soon.

'Makes People Nervous'

Alex Robles, a cannabis consultant and head writer at inmygrow.wordpress.com, agreed. Robles is telling his clients to stay away from any publicly traded stock for American cannabis companies.

“The illegality makes people too nervous,” he said. His alternative? “Invest in those companies that build the systems that make those commercial operations operate, i.e. greenhouses, lighting, ventilation. It’s not as sexy as being a cannabis baron but is safer during prohibition.”

Jordan Tishler, a Harvard physician and expert in cannabis therapeutics, also takes a reserved outlook, but does have several paths cannabis investors can take right now.

“First, look at products that uniquely meet a need” Tishler said. He recommends products like the CannaKloud. “It’s the only vaporizer that delivers a fully metered dose of cannabis vapor, and nothing else can do that.

“Second, consider the investment horizon,” he added, which should get stronger on a year-to-year basis as legalized consumption grows more pervasive.

When it comes to a short-term play, the exploding recreational market is a good strategy, Tishler said.

“Unlike what the pundits are saying, it is not likely that legalization will convert more people to consumers” he said. So while a significant 10 percent of Americans currently use cannabis, it’s a “capped market” he explained.

Big Potential

Others see marijuana as the new tobacco.

“If there is ever federal clarity, then the tobacco players will get involved,” said Allen Gillespie, a financial planner at FinTrust Investment Advisors.  That could lead to “a play in municipal bonds related to the Master Settlement Agreement.”

"The few public ways to play it fall into the penny stock with high market cap categories," Gillespie said, "so apply normal risk considerations there.”

Tishler has more faith in the medical market, and that’s where he points us for a longer-term cannabis play.

“Far more Americans are middle aged and elderly,” he said. “The population is only getting older and sicker.” As cannabis becomes the treatment solution for illness and pain, these treatments “will present a market that will dwarf recreational [markets],” he added.

For now, there isn’t much financial faith being puffed and passed around the cannabis-investing campfire. Still, it’s an industry worth keeping your eye on while it crawls toward more expanded legalization.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].

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