Pot stocks: is it worth investing in cannabis?

The increasing liberalisation of cannabis across the world is fuelling excitement among investors who regard the drug as the next big trend for both consumers and medicine.

In October, Canada became the second country, after Uruguay, to legalise the possession and recreational consumption of marijuana.

Canadian cannabis companies such as Canopy Growth, Tilray, Aurora and Cronos were not well known to investors at the beginning of the year, but by October their stocks were “flying high”, says financial news site InvestorPlace.

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So will the green rush be the next gold rush?

What are the benefits of investing in pot stocks?

“Getting into a growing industry at an early stage is often the best route to a handsome return,” says personal finance site Love Money.

According to London-based economic think-tank the Adam Smith Institute, the global market for medicinal cannabis alone is expected to be worth £40bn by 2025.

Along with the legalisation in Canada, investment is being driven by increasing interest in the potential US market, with more than half of the country’s states having legalised cannabis for medical purposes, says the Financial Times.

Recreational use of the drug is also allowed in nine US states, and Coca-Cola is even said to be considering developing a line of cannabis-infused drinks.

The UK market looks set to thrive, too, following the relaxation of laws on medicinal cannabis, with doctors now able to prescribe cannabis-derived drugs to patients.

At least two UK manufacturers are aiming to develop cannabis-based medicines - Ananda Developments and Sativa Investments, which are both listed on the junior Nex market, according to the FT. “GW Pharmaceuticals, another British company, was previously listed on Aim but has since relisted in the US,” says the newspaper.

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What are the biggest drawbacks?

Most institutional investors are “proceeding with caution” in the US because of the illegal status of marijuana under federal law, says Yahoo! Finance.

Investors are also divided over whether the cannabis market should be lumped into the so-called sin industries, which include cigarettes and alcohol, or whether it is closer to the healthcare industry - an important debate amid an increasing push towards socially responsible investing.

Another big concern is the volatility risk. Analysts advise that investors should only buy cannabis stocks as part of a diversified portfolio, after carrying out thorough research into the relevant laws, industry and company.

Despite such provisos, many investors believe the potential rewards are worth it.

Rick Kimball, managing member of Samphire Capital Management, tells Forbes: “If you have the resources to do the research and can stomach the risk, these are the fanciest returns we’ve seen in a long time.”