“Herb is the healing of a nation, alcohol is the destruction.” –Bob Marley
Marijuana by any name is an herb and a flower, but capturing the investment potential in the plant is as frustratingly elusive as it is enticingly rewarding. In many ways, medical marijuana companies are the quintessential microcap stock–long on story and sizzle and short on revenues, capital and management. Yet, the enthusiasm for cannabis as a transformative investment thesis (the “Green Rush”) has arguably reached the frenzied level of the internet bubble at the end of the millennium. This enthusiasm is fueled by the enormous and growing customer base of loyal, if covert, recreational cannabis users and, importantly, by the genuine value for using cannabis to treat poorly addressed health challenges. Successful medical marijuana microcap investors, however, must temper their excitement with the practical realities of the regulatory disconnect at the federal and state levels and the resulting necessity for companies to establish state-specific operations to get products to consumers.
The challenge for the brave microcap investor is to assess the cannabis stock winners whose shareholder value will flower and avoid the losers that will rapidly wilt in the capital markets. Cannabis is not different from any other industry in evaluating fundamentals. Success will depend on the “PPM” factors:
Product
People
Market/marketing
Product: The cannabis-related product needs to be more than a commodity. It should be differentiated—whether by composition (strains used) or intended effect or use, branded and ideally have the ability be sold in different states or distributed across state lines. Due to regulatory heterogeneity at the state level and its tax consequences, the current opportunity is skewed more toward the medical space than the recreational space. Medical marijuana products which offer a benefit and are more affordable than conventional therapies, such as prescription pharmaceuticals, are more likely to succeed. Winning products have a plausible promise and promotion that is credible and resonates with the consumer.
People: Management is critical to the survival and growth of early stage companies in a nascent industry, even more so in a sector with an uncertain, changing and complicated regulatory landscape. The maxim “bet the jockey not the horse” is particularly relevant in the cannabis sector, because it often attracts inexperienced opportunists who have assumed their management position based on their familiarity with cannabis rather than on leadership and financial and managerial experience. Seek management teams with accomplishments outside of the cannabis sector that, with their context of other industries, are firmly committed to the potential of cannabis and the business of cannabis-related products.
Market: Assess the demand for the product(s), particularly in medical marijuana states. Estimate the addressable markets by identifying the states where the product(s) may be sold, understand the competition and pricing, the likely range in market share, and the growth trajectory. For example, the states of Colorado and Washington afford cannabis companies the opportunity to reach the medical and recreational markets; however, the state of California is significantly larger in population. Also, keep in mind that there were a number of initiatives in the recent midterm elections (notably Oregon and Florida) that impact market opportunity.
In addition to PPM (Product, People, and Market) considerations, there are other considerations in analyzing the investment potential of microcap marijuana stocks. Look at the number of paid promotions versus the substantive announcements regarding product and strategic alliances. Trading volume and price trends are also critical. Does the stock gallop or halt? Regulatory intrusions can kill a company and impact the sector. Are insiders also believers and buyers–investing in themselves? Or are they selling and enriching themselves at the expense of the retail investor? Finally, when evaluating a microcap marijuana stock, focus on their business model and the plan of implementation.
Microcap stocks, whether medical marijuana or otherwise, are considered highly risky investments. But this risk is more than offset by the broad secular move to legalize marijuana. The benefits of medical marijuana are increasingly accepted, and recreational marijuana is becoming more mainstream. Unlike the end of Prohibition, this is a global movement and potentially an unprecedented investment opportunity if one carefully selects the right medical marijuana microcap stocks, with the power to monetize the “healing herb.”
About the Authors:
Stella M. Sung, Ph.D., Chairman & CEO, Tauriga Sciences
Dr. Stella M. Sung brings almost 20 years of leadership experience in the healthcare sector as both a senior operating executive and an early stage life science venture capitalist. In addition to her role as Chairman & CEO of Tauriga Sciences, Dr. Sung is Managing Director of Pearl Street Venture Fund, a life science venture fund. She previously held the position of Chief Business Officer of Cylene Pharmaceuticals, a venture-backed oncology company and served as Business Development Officer of Avita Medical, a public regenerative medicine company. Dr. Sung has served as a Managing Director or General Partner for several life science venture firms, including Coastview Capital (founded by former Amgen CEO Gordon Binder) and Oxford Bioscience Partners. She has led venture rounds of financing for seven transactions, co-founded two biotechnology companies, served on 7 Boards of Directors and served as Chairman of the Board for four biotechnology companies. Previously, she focused on life science and health care investments at Advent International, a global private equity firm that has raised over $6 billion in cumulative capital to date. Dr. Sung received her B.S. in chemistry from The Ohio State University, where she was elected to Phi Beta Kappa and her Ph.D. in chemistry from Harvard University, where she was a National Science Foundation Pre-Doctoral Fellow. She earned her Harvard Ph.D. under the guidance of Professor Dudley Herschbach, the 1986 Nobel Laureate in Chemistry.
Lawrence A. May, M.D., F.A.C.P, Chief Medical Officer, Tauriga Sciences
Lawrence May MD is a board certified internist with broad experience in clinical medicine, academics, media and business. Following residency he joined the faculty of the UCLA medical school where he directed the health services research center at the Wadsworth, VA hospital and served as a founder and co-director of the center for health enhancement education and research {CHEER} at UCLA. He continued on the clinical faculty after entering private practice, Dr. May has written many books and articles including a widely used textbook entitled Primary Care Medicine. Dr. May became an important formulator of nutritional products and served as executive vice president for medical and scientific affairs for Herbalife International. He has appeared in the media, lectured internationally, and consulted to industry and medical institutions, as well as serving on their boards. He was a founder of Physician’s Therapeutics and helped develop its parent company, Targeted Medical Pharma. He is an advisor to Stock News Now (SNN), writes for microcap review and evaluates biopharmaceutical companies as an investor. Dr. May received his undergraduate degree magna cum laude in economics from Harvard University (’70) where he was elected to Phi Beta Kappa. His medical degree was also earned at Harvard Medical School (’74) and residency in internal medicine was served at Massachusetts General Hospital.
MAPH Enterprises, LLC | (305) 414-0128 | 1501 Venera Ave, Coral Gables, FL 33146 | new@marijuanastocks.com
4 comments
Very good points here and a very interesting read. Those 3 points are very crucial for analyzing a company and making sure the trader makes the quality investment. Keep up these great articles!
I totally agree. There are definitely challenges to finding the stocks and companies worth of investing in. That is the same with any industry I suppose. There are definitely some leaders in this industry worth the investment $$.
This is a very well written article. PPM is a great way to evaluate a company to determine if you are making a sound investment. I have been investing in microcap for years and I like the philosophy of “bet on the jockey not the horse”. Keep up the great work!
End-of-Prohibition analogy is compelling: 1) Banned but widely-consumed agricultural product legalized for extensive range of uses; 2) Thousands of NEW companies created (for practical purposes) OVERNIGHT, the modern-day entrepreneurial equivalent of the post-Cambrian explosion of species; 3) Highly dynamic post-legalization regulatory environment.
All suggest need for and value of approaches for investing in marijuana, similar to other industries. But must keep in mind marijuana will behave much more like growth sector post-disruption. Winners are patients, consumers, entrepreneurs, and society (less alcohol-related morbidity and accidents/violence, increased tax revenues). Losers TBD, but for sure will include drug cartels, maybe manufacturers of prescription painkillers.
First end-of-Prohibition touched every aspect of early 20th-century society. Marijuana legalization will do the same for society in the early 21st.