Pot Stocks: A gateway drug to portfolio losses?

By Xavier Brenner

These are high times for marijuana legalization advocates.

Some 20 states and the District of Columbia have legalized the use of medical marijuana and Colorado and Washington State now allow the recreational use of the drug.

The Viridian Cannabis Stock Index of 75 publicly traded companies reported a 38.4 percent gain in 2014, according to CNBC.com.

 

stocks

Budding Prospects

So is it time for investors investors to join the party?

While there's no question societal attitudes toward marijuana use are loosening up, this is a sector fraught with risk for investors.

The champions of marijuana's legalization contend that a regulated marijuana market would generate precious tax revenue and refocus drug enforcement efforts on more socially harmful narcotics such as cocaine, heroin, and crystal meth.

 

The Feds

However, it's worth remembering that the production, sale, and use of marijuana has been illegal at the federal level since 1937.

In 2013, the U.S. Department of Justice said it wouldn't challenge state legalization laws.

That's the Obama administration. Who knows if the next one, especially if run by a Republican President, would feel the same way.

 

Next President

New Jersey Gov. Chris Christie, a likely GOP presidential candidate, is already on the record promising to eliminate legalized marijuana in states like Colorado and Washington if he’s elected president.

Listed marijuana stocks tend to be very small-cap, illiquid and prone to big price swings.

Investors can find all manner of pot plays that offer consulting services in medical marijuana states or make pipes and other accessories used to smoke weed.

 

Cannabis Plays

They include: Novus Acquisition & Development (NDEV), Abattis Bioceuticals Corp. (ATTBF), United Cannabis Corp. (CNAB), mCig (MCIG), and Cannabis Sativa (CBDS).

All told, there are about 80 pot stocks, including AeroGrow International Inc. (AERO) and Zoned Properties Inc. (ZDPY), according to MarijuanaStocks.com.

 

Reefer Madness?

In 2014, the Securities and Exchange Commission issued an investor advisory noting the big risks investors face.

Aside from the possibility these marijuana companies may face future federal criminal prosecution, the SEC warned investors to beware of possible fraud schemes and pump-and-dump stocks.

In 2014, the SEC temporarily suspended trading in five marijuana-related stocks.

 

Takeaway

It may be too early for investors to bet big on marijuana stocks.

There remain big legal and regulatory risks at the federal level.

On top of that, it's tough to find big, liquid stocks with established track records.

There are more stems and seeds than big buds among pot stocks.

 

Photo Credit: Coleen Whitfield via Flickr Creative Commons

The investments discussed are held in client accounts as of June 8, 2015. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable .








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David Levine

David Levine

I am a value-oriented investor and a former financial adviser for Prudential Securities. I left the industry in 2000 and

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