NEW YORK (TheStreet) -- High on marijuana stocks? You'd better do your homework before investing. A "420 friendly" portfolio still carries plenty of risks, conflicting state and federal laws among them.
"When it comes to investing, the question is: A) Am I going to get a return on my investment, how safe is it? And B), do I have any potential criminal things I need to be concerned about?" said Dan Humiston, President of the International Cannabis Association, a sponsor of the Cannabis World Congress & Business Exposition, held in New York in mid-June.
The industry has exploded in recent years, with the Marijuana Medical Business Daily estimating its current value at $3.1 billion.
According to Cohen Grassroots Research, a California-based investment research company, there are about 280 publicly traded marijuana companies operating in the United States, 260 of which are listed for trading. Around 140 of those companies report to the SEC, 80 utilize alternative reporting methods, and the rest are non-reporting.
Just a handful of the public companies have a market value of more than $500 million, while the vast majority -- Cohen estimates more than 240 -- have a market cap of under $50 million.
"The most important thing to remember is that 90% of the companies out there are penny stocks, and most of them are scams -- there's a lot of garbage out there," said Adam Heimann, creative director and partner at MarijuanaStocks.com, a website that tracks cannabis investments and news. For potential investors, with the exception of a handful of companies that are long-term holds, the best strategy is to focus "on day trading, trying to ride momentum, taking a quick profit."
Conflicting laws create another risk. Medical marijuana is currently legal in 23 states and Washington, D.C., and laws allowing recreational marijuana use have been passed in Colorado, Washington, Oregon and Alaska.
Marijuana is, however, still federally outlawed and is listed by the Drug Enforcement Administration as a Schedule I controlled substance, putting it in the same category as heroin, LSD and ecstasy.
The takeaway for investors: it's a jungle out there.
Heimann pointed to GW Pharmaceuticals (GWPH) , a U.K. biotech company that develops cannabinoid medicines to treat multiple sclerosis spasms and cancer pain, as a potential long-term holding. Along with Insys Therapeutics (INSY) , another biotech company in the cannabis arena, GW Pharmaceuticals trades on the Nasdaq.
Heimann also mention Cannagrow Holdings (CGRW), which he described as "a penny stock backed by land."