Blog : Lessons from the Cannabis Business Summit

by Peter Leeds on July 28th, 2014

I was recently asked to attend a panel at the Cannabis Business Summit in Denver, Colorado.  Yes, the Denver with a shop selling marijuana on every block.  And yes, the Denver which put on a Super Bowl meltdown clinic a few months ago.

Doing a little preliminary cannabis research felt like quite an adventure.  A pit bull wearing a home-made muzzle, fashioned out of what must have been a piece of a cage or fence, came out the door as I walked in.  I stepped aside to let the dog's owner pass by on his wheelchair, partly out of politeness, partly out of fear of the canine beast.

Up a ramp I went, until I had to stop at a locked door.  I buzzed a door bell, just as the note posted on the wall suggested.  The speaker beside the pinhole camera said, "Show your I.D."

Displaying the document to the camera resulted in the door unlocking with a buzz.  And I was in.  After having to show my I.D. again to the man behind the counter, I was given the tour of what would have been a teenagers dream.  Enough pot in so many variations that you could smoke, or eat, or drink yourself to a pretty good buzz.  

My interests in legalized marijuana are two fold.  As a financial analyst for my speculative stock newsletter, all shares of cannabis-related companies are so highly overvalued right now that they are setting up optimistic investors for a world of hurt.  At the same time, having multiple sclerosis gives me reason to be interested in the documented benefits of cannabis for MS sufferers.

People might get confused, as it seems to many that I am both a proponent and opponent to legalized marijuana all at the same time.  To them, I would explain that I am a proponent of legalization, but an opponent of over-priced shares of stocks in financially weak companies.  I want to see people with illnesses use whatever makes them feel better, while I do not want to see thousands of hopeful investors lose their cash by buying into hyped-up stock market manias.

In other words, I like tulips, but I would warn that the Dutch Tulip Bulb Mania was probably not a great time to sink your life savings into a few flower bulbs.

Fast forward a day, and I was set up at the Cannabis Business Summit on a panel about marijuana penny stocks.  The room was full, and I shared the stage with big players in the business of taking these smaller companies public.

I question if what the industry really needs is more publicly-traded cannabis penny stocks.  Having these hype-driven companies trading at valuations as much as a half billion dollars, despite the fact that their revenues are often pretty closer to zero, typically ends in a bad way.  Reality eventually sinks in.  
Many investors have already taken pretty big losses by this point, and we're just getting started with the coming collapse.  You may call it a return to sanity, you may blame the unsophisticated investor, but either way the shares are coming down.

When these over-valued cannabis penny stocks saturate the market, it is bad for investors, but it is also bad for the entire marijuana industry.  Instead, what is needed is for the legalized marijuana movement to be built upon healthy, fundamentally and financially solid corporations.  

Instead of losing money on the shares, investors should be watching their stocks slowly and sustainably grow.  The industry would benefit as the underlying corporations got bigger.  Unfortunately this is not the situation we have currently.

The masses have been stampeding into any and every company with the word "cannabis" in their name.  Many of these formerly unknown, almost bankrupt, corporations have found a new life.  Unfortunately, the unjustified increase in the prices have done little to improve the financial train wrecks of their financial reports.

There is even the example of one oil and gas company, which was approaching bankruptcy.  By simply adding "cannabis" to their business focus, the share price shot up.  A lot.

Overall the conference, put on by the National Cannabis Industry Association, was well attended and well run.  I had to laugh when I saw many of the presenting companies at the booths, since they were the exact corporations I had been warning about, and which investors should be avoiding.   They may be worth hundreds of millions of dollars on the stock market, but in the real world as a business they are really worth somewhere in the negatives.  I'd argue that I know the financial situation of many of these companies better than the spokespeople sitting at the booths!

What most people don't realize is that there used to be hundreds of car companies in the United States.  Hundreds.  Now there are the survivors, the Big Three.  What happened to the rest?  Well, they went bankrupt, or they merged with another automobile company and went bankrupt, or they were acquired by another corporation and went bankrupt...  

Just as the automobile business was a great one, it was terrible for investors.  The cannabis industry will eventually be a great one too...  but it will continue to be terrible for investors.  An excellent concept does not make an excellent investment, which is something the masses don't understand as they throw all of their money, and their cousin's money, and their Grandma's money into the black hole of financially broken companies with Cannabis in their name.

I was surprised to see such a push of new companies trying to get into the marijuana business.  What I had expected to be a panel warning of the dangers of buying these over-priced cannabis penny stocks actually became a forum for the next wave of marijuana businesses to learn how to get rolling.

It would seem that neither the investors, nor the underlying businesses, have yet slowed down.  They will, just like they always do, but until then it behooves the individual to step aside until the smoke clears.  Unfortunately for the masses they will probably do the exact opposite, until they have no more money to toss into the pit.