News that federal prosecutors have wider discretion to enforce federal drug law could put at least a temporary damper on investment money flowing into the U.S. cannabis sector, but analysts doubt the money will dry up.
U.S. Attorney General Jeff Sessions’ decision last week to rescind Obama-era protections for the legal cannabis industry has created new uncertainties for investors thinking about pumping money into U.S. marijuana companies.
Reflecting the jittery environment, cannabis consultants reported a flood of nervous emails and phone calls from investors.
“It’s awful,” said Alan Brochstein, founder of 420 Investor, a Houston-based firm that advises interested cannabis investors.
Brochstein said a scattershot federal marijuana policy is worse for cannabis investment than even a stricter enforcement policy from the U.S. Department of Justice.
“How can businessmen and women proceed without knowing what the rules are?” he asked. “That is the worst thing for investment.”
Analysts advise calm
But Brochstein and other advisers are preaching calm, pointing out potential opportunities in continued federal uncertainty.
The largest investors, such as banks and pension funds, are going to take the Sessions announcement to heart.
That’s not a bad thing for smaller investors who have a stomach for uncertainty
“The announcement will put a further chill on the institutional investors who have been remaining on the sidelines thus far,” said Perry Salzhauer, a lawyer with the Green Light Law Group, an Oregon law firm serving the cannabis industry.
“The opportunity for those investors with more risk tolerance remains historical, given the significant lack of competition for investment opportunities with the big players out of the game.”
The announcement could also scare off large companies considering tiptoeing into the cannabis industry themselves.
Whether it’s Scotts Miracle-Gro starting a subsidiary aimed at cannabis growers, or large alcohol conglomerate Constellation Brands investing directly in a Canadian marijuana business, big companies may well take the Sessions announcement as a sign the marijuana industry is too risky.
“It could temper investment flow from the big companies, which could be an opportunity for other companies,” said Matt Karnes, founder of GreenWave Advisors, a New York-based research and analysis firm for the cannabis industry.
Karnes pointed out that cannabis investment is already flowing to the largest U.S. recreational markets – places where federal prosecutors are less likely to go after a state-licensed cannabis business.
Government officials in those states were quick to criticize the attorney general’s decision – indicating they are prepared to take legal action to defend their marijuana industries. U.S. attorneys in those states, as a result, may be less inclined to target companies that abide by local laws.
“The markets lifting the industry up, it’s California, it’s Massachusetts, where I don’t think you’re going to see a lot of change,” Karnes said.
“So it could have not much of an impact on investors as long as larger, more significant states continue to maintain states’ rights for marijuana policy.”
Potential rebound?
Looking ahead, Costello and other cannabis analysts predicted a swift rebound for marijuana investment because the announcement makes it more likely Congress could act on setting federal marijuana policy.
In fact, U.S. and Canadian cannabis stocks briefly tumbled after Sessions’ blockbuster decision.
But by Friday’s close, the day after Sessions dropped his bombshell, U.S. marijuana stocks had recouped about half their losses. And Canadian share prices actually closed at record highs.
“My hope right now is that this will actually push Congress to create some safeguards” for investors, Brochstein said.
The industry could even benefit from cooling expectations of explosive returns.
Scott Greiper, president of New York-based Viridian Capital Advisors, said the marijuana sector has seen some “ridiculous valuations” thanks to investor exuberance in marijuana’s potential.
“Sometimes it takes a trigger like this to bring some rationality to the market,” Greiper said.
Kristen Nichols can be reached at [email protected]
