Marc Ruiz of Oak Partners, Mind on Money: Beware the ‘Pot Stock’ Frenzy

Marc Ruiz of Oak Partners, Mind on Money: Beware the ‘Pot Stock’ Frenzy

If I must have one more conversation about marijuana stocks I’m going to need a drink. With the impending high-profile recreational legalization of marijuana in Canada, “pot stocks,” whatever they are, have gone insane over the past two weeks, ensnaring some investors I wouldn’t have thought would be susceptible to this speculative frenzy.

As we begin to play around with this topic, I want to first call attention to the fact that both the Securities and Exchange Commission and the securities industry's self-regulatory organization, FINRA, have both disseminated well thought out, easy to understand investor warnings regarding marijuana stocks over the past few years. These warnings, which can be found online, are steeped in something that seems to be antithetical to the marijuana stock craze I am being forced to discuss on a seemingly daily basis: logic.

I can almost hear the dismissal now. “Marc, you’re just anti-pot, you’ll never understand.” This sounds a bit like the Millennial eye roll I was getting whenever I got roped into discussions about crypto-currency. How’d that work out?

Well, first, let me go on the record saying that as a person highly predisposed to individual liberty, I’ve never understood why marijuana occupied the legal position it has for 100 years or so in the first place. I’ve always wondered how, if you could grow it in the backyard, why is it illegal? So, no, I am neither anti- nor pro-pot. I’m ambivalent to pot, seeing it more as an entertaining curiosity than anything else.

What I’m not ambivalent to is people losing money. I’ve experienced speculative frenzies before. Dot-com stocks and cryptocurrency come immediately to mind. But of course, this time it’s different — this time I really just "don’t understand."

Here’s what I do understand. This product, marijuana, has involved material social stigma for 100 years. So even if it were to become recreationally legal in the U.S., there is a group of consumers (like my wife) who simply will never adopt the product. So, if you tell me “the sky’s the limit” for cannabis, I’m going to take issue with your logic.

I also look at the product and see two primary uses, medical and recreational. Both industries, pharmaceutical and consumer products, are already extremely well established. Both industries have established marketing programs, distribution channels, supply chains and highly effective management teams. If marijuana becomes legal and more socially acceptable, I would expect established companies in both industries would look to enter the cannabis market. Some have already started to explore this space by making acquisitions, strategic investments and R&D.

Following my logic, if marijuana did become legal and destigmatized, my opinion is that the marijuana products industry would mature rapidly, quickly becoming integrated into existing brands or consumer product and pharmaceutical offerings. If the market really is as huge as the speculators like to hope, tobacco companies, beverage makers and drug companies aren’t just going to sit back and watch.

Which leads me back to the original SEC and FINRA warnings. With the reasonable assumptions I’ve laid out here, where does that leave start-up pot companies with no assets, no revenues and no unique process or unique product to speak of? The answer is, in the danger zone.

I am unable to provide actual investment advice in this column, and if someone wants to speculate on pot stocks, nothing I’m saying here is going to talk them off the ledge. I would just beg that you not bet your kid's college fund or even the rent money on this bubble.

I’m sorry, but I just don’t believe the next great consumer products or drug company is trading like wild in the NASDAQ pink sheets right now disguised as a pot stock.