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When you hear people talk about cannabis, the stereotypical images conjured up are verdant fields of marijuana and lazy stoners. The real story of the legal cannabis industry is, in fact, much bigger than that. The fight to make cannabis a legal, viable industry has the potential to transform entire systems of sustainability, healthcare, energy and the fight against climate change, and criminal justice, just to name a few.
Despite the capabilities of the cannabis plant to have such a profound effect on our country (and planet), there’s a trend in the investor sphere picking up steam to bully cannabis stocks and dissuade investors from the category.
MarketWatch, for example, ran a story entitled “Invest in marijuana? What are you smoking?,” which argues that “The rapid rise of marijuana legalization has created what some people call a bubble for marijuana stocks [...] reminiscent of the dot-com craze in 1999.”
While it is true that marijuana investment has exploded at unprecedented levels since Canada and populous states like California and Illinois legalized recreational marijuana, simply calling it a bubble based on where the industry is today is, frankly, lazy. An economic bubble, defined by Investopedia as “an economic cycle characterized by the rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior.”
The Looming (Or Not) Cannabis Bubble
The fear of a bubble is that you’ll have companies like Canopy Growth Corp (NYSE: CGC)
potentially overvalued by the stock market and then, when the company underperforms to the huge expectations, the stock (and industry) crashes.
The thing is, on any given day you’ll find two industry analysts who emphatically disagree whether this looming bubble has happened, is happening, or never will.
(A special shout-out to the Motley Fool for both vantage points)
We’re in the aftermath of the bubble.
The argument that the growth of the cannabis industry, which is providing real products and comfort to people, somehow compares to the overvaluation and eventual demise of pets-dot-freaking-com in the 1990s fundamentally misunderstands what is driving the future growth of the cannabis industry: science and technology.
First, though, two points about the so-called “cannabis bubble,” which is largely focused on the recreational companies like Canopy Growth, since this may scare future investors off from cannabis science and technology companies.
1) While the stock markets may have overvalued certain companies at this point which will lead to a correction in the value, the underlying fundamentals of the industry—consumer demand and the ability to supply it—are thriving.
Let’s remember that in the United States the “legal cannabis industry” exists as a patchwork of competing state laws, each with their own confusing net of bureaucracies. For the most part, interstate trade of cannabis goods is prohibited by the continued federal scheduling of marijuana as a Schedule 1 drug. That creates huge problems where productive states like Oregon have too much supply that can’t be moved to other states or countries that can’t meet the demand.
Secondly, the amount of people using and trying cannabis between the 1980s and 2013 held steady, despite it being nearly universally illegal. Since 2013, many states have legalized medical or recreational use, while more Americans have come to approve of legalizing marijuana across the board.
Right now, the cannabis industry is being kneecapped by federal drug and trade policies, but people who talk about a cannabis bubble act as if the industry is run like the largely unregulated wild west of the dot-com craze.
Related Story: Will There Be Enough (Legal) Marijuana In Canada This Year?
2) Furthermore, while the bubble-busters speak doom upon investing in the industry, we are still dealing with the legal cannabis industry in its current, nascent form: a dispensary-driven consumer enterprise. Sounding the alarm at this point misses the long-term growth forest for the short-term growth trees.
While the cannabis industry’s biggest companies right now are represented by the likes of Canopy Growth and Aurora Cannabis Inc (NYSE: ACB), which focus primarily on the cultivation and sale of consumer-based cannabis products, the future of the cannabis industry will be driven by the science and technology of cannabis. Until federal legalization opens up avenues for academic research, interstate and international trade, and federally-protected banking, we won’t see the true potential of the cannabis industry.
At The STEM Of It
At its heart, the cannabis is a STEM industry—driven by solutions from science, technology, engineering and mathematics. The challenges of the cannabis industry, as a highly-regulated industry that touches on healthcare, criminal justice, climate change, and energy policies, are manifold, but will inspire a wave of entrepreneurial spirit.
Benzinga's Cannabis Capital Conference heads to Detroit on Aug. 15 -- Click here to learn more!
That STEM cannabis entrepreneurial spirit has grassroots industry efforts supporting it. Late last year, Portland, Oregon dispensary ordering and delivery provider, Stemless, and The Oregon Girls Collaborative Project (OGCP), hosted a “cannabis infused dinner with purpose” to help fundraise and further involve young girls in pursuing an education in STEM fields.
I have spoken with a wide assortment of people who are working to accelerate the science of cannabis. The consensus amongst these entrepreneurs is that the potential of cannabis technology in science is far beyond where we’re at today, even with pronounced advancements in artificial intelligence, big data collection and interpretation, and genomic research.
The future of cannabis will be driven by innovative research. Here in the United States, that won’t be realized until the proverbial handcuffs are removed, and cannabis investment opportunities are given the same considerations as mainstream ones.
The entrepreneurial researchers I've spoken with are eager to disprove the stigma of cannabis by way of science. Some of what’s not been legally possible to research in the United States has already been done in more cannabis-progressive countries like Israel and others. So the cannabis scientific community is more than ready for the opportunity to catch up should FDA policy changes, like rescheduling or entirely de-scheduling marijuana's drug classification, allow it.
One area that is primed for explosive scientific growth right now—and worthy of the attention of investors—is the cannabis healthcare industry. Since it is further along in some ways, it provides a model for other aspects of science in cannabis. “The expectation is that the scientific community will move quickly and diligently with the permitted laws to provide clinically validated data that supports the clinical efficacy, safety and dosage for specific cannabinoid-based formulations and specific indications," Dr. Oludare Odumosu of Ilera Healthcare is quoted as saying in an article by Andrew Ward.
But, as Dr. Jacklyn R. Green, CEO of Agate Biosciences—an innovation consultancy for agriculture—tells me pointedly, “The cannabis industry is stuck in an 1800s agrarian society mentality.” Farmers, while important, are not the source of all cannabis knowledge anymore, Green argues. “While the 1800s mentality worked in an unregulated market,” Green continues, “now we must meet and exceed consumer expectations and ensure compliance with the government entities.”
With a background in Systems Engineering and Management borne out of 27 years at NASA, Green has the experience to diagnose the larger systemic issues of the industry and its regulators. “In this important new area for the cannabis industry, we consider the optimization of all aspects of STEM subjects: genetics, germination, cultivation, growth, harvest, post-harvest activities, processing and manufacturing, and retail/medical dispensary operations. The big difference is that we consider them as elements of a necessary, optimized full set of processes for cannabis product development.”
Long Term Investment Strategies Will Prevail
Optimizing the science of cannabis to become a functional, well-regulated part of the industry will require an open-minded collaborative effort between private and public entities. Thanks to a legal obstacles and the slow speed of turning scientific research into profitable products, investing in the science of cannabis will require a Warren Buffett approach: long term gains without panicking over short-term performance.
Let’s take a look at what is driving the science of cannabis, and where investors can find opportunities.
Where Is The Growth Going To Come From?
Right now, you can look to the challenges of the cannabis industry as it exists today to find a whole host of investment opportunities.
“We’ve seen some of the biggest growth from cannabis software companies,” says Jill Ellsworth, Founder and CEO of Willow Industries, which provides post-harvest microbial decontamination for cannabis crops. “Whether it’s workflow management software, seed-to-sale tracking, or enterprise resource planning, there is a huge demand for these services in the industry. The companies providing these solutions will continue seeing massive growth as new markets come online, especially because they can easily onboard new customers.”
Because the cannabis industry has so many regulatory requirements, the entire industry will need incredibly secure infrastructure, from the production and distribution of the products to the technology that will enable a legal consumer industry. For example, as medical marijuana becomes an accepted part of healthcare, some dispensaries may need to protect personal information that is covered by HIPAA, the Health Insurance and Portability and Accountability Act, which protects a consumer’s right to protect and control their health history. That will require a unique technological solution.
Then there’s what you can do with cannabis beyond making a better dispensary. When cannabis research takes off, we’ll be able to craft better strains to grow more efficiently and advance cannabis as a medicinal option. As Ellsworth says, “There is also a lot of exciting growth happening in cannabis biotech. The companies in this space are using cutting-edge technology to improve traditional cultivation practices. One example in the space would be a company using the cannabis genome to optimize their breeding practice, and that is just the beginning. Over the next ten years, we’ll see cultivation change as the data improves, so this is an area you’ll definitely want to keep your eye on.”
Dr. Robert Flannery, Ph.D., of Dr. Robb Farms, made this interesting case to me about the effect that greater research into the science of cannabis will have.
“We know that CO2 injection in an indoor grow provides a significant boost in yield and potency, and now there's technology that can provide that benefit to outdoor growers as well. AG Gas is a company that uses AI driven decision-making to provide the ability to inject CO2 into the canopy for field-grown crops. When I first saw this technology, I thought it was practically impossible; however, I saw the results from a university-driven research project to validate this technology. Unfortunately, they could not use cannabis as a model plant for the study, so they used tomato. They saw an increase of yield of over 120% with tomatoes that were treated with the AG Gas technology.”
This “mind-blowing” technology, to borrow Dr. Flannery’s description, is one drop in an ocean of scientific advancements that a flourishing cannabis industry will need to inspire. And there will need to be a corresponding level of investment from state, federal, and private sources to drive these new avenues of public and private research.
The Science Of Cannabis Is A Smart Investment In The Future
Today, investing in cannabis can be a tricky and harrowing experience. With federal prohibition in place still, many U.S. cannabis companies are listed on the Canadian Stock Exchange, and those U.S. companies are still forced to operate largely on a cash-only basis. Melissa Fauth, President of Fritsch USA, which produces application-oriented laboratory instruments for sample preparation and particle sizing in industry and research laboratories, has seen the chilling effects that these challenges have had on established companies getting into the industry.
“There is a lot of reluctancy from companies to fully engage and immerse themselves in this industry because they're worried about how they will look to other customers. Could we get into issues with legal or banking concerns? It makes it challenging for folks to initially invest.”
Despite the challenges, Fritsch sees a cultural shift happening that is opening up the future for the science of cannabis. “When you have the right mindset and you understand the cannabis industry from a medical perspective or clinical perspective, a research perspective, the patient side, the manufacturing side, you realize that there's a whole industry out there coming together and collaborating to make all of those investments work together up and downstream.”
In the short-term, investing in the science of cannabis will have ripple effects for the agricultural industry at-large. “Investing in the science of cannabis cultivation is a smart investment,” Dr. Flannery says, “because you're not just investing in cannabis. You're investing in agriculture in general. Not everyone consumes cannabis. Everyone consumes food. So, this investment in making cannabis cultivation more efficient directly affects how we grow our food.”
Once the federal hurdles to research and investment have been removed, investing in the science of cannabis still won’t be easy, since it is such scientific and highly-regulated industry subject. Scott Kuzdzal, Ph.D., the VP of Marketing at Shimadzu Scientific Instruments, gave me some sound advice for first-time investors. His company, which has helped build the foundation of the cannabis quality control market, is knee-deep in the science of understanding the accurate make-up of cannabis’ potency, terpenes, pesticides, and more. As “the first analytical and medical solutions provider to assist cannabis QC labs,” according to Dr. Kuzdzal, he and his team know the challenges and possibilities that come with cannabis research and scientific advancements.
Dr. Kuzdzal lays out a course for investors interested in the science of cannabis. “My first recommendation is to get informed. Attend key industry events like the Cannabis Science Conference where analytical, cultivation and medical professionals gather to bridge existing gaps and you can talk with key companies developing new STEM technologies. Before investing, become educated in trends shaping cannabis STEM. My advice is to also look very closely at companies emerging in hemp related markets, which is projected to grow to $90B by 2025. Moreover, be prepared to invest for the long haul. There are still many legal and regulatory potholes ahead, so proceed with caution.”
The Cannabis Industry Beyond Cannabis
The science of hemp, perhaps more than marijuana, will be the biggest driver of scientific investment. From hemp-derived CBD oil to hemp concrete to hemp plastic to oral healthcare hemp batteries to hemp gasoline...you get the point—hemp has the potential to drive a lot of scientific advancements that, as Dr. Kuzdzal says, will be “long haul” investments.
The cannabis industry will be—already is!—much more than a field of marijuana waiting to be harvested for sale in a dispensary, where it will be turned into a joint. As scientific and technological advancements in the agricultural production, distribution, security, and sale of cannabis arrive, they will better the other players in those industry. And, when research universities and private research facilities have access to the same sort of financial investment that pharmaceutical industries and Silicon Valley have, advancements that seemed like pipe dreams can finally come to fruition.
But first, we’ll need to burst the cannabis bubble (if there is one) that keeps investors from seeing the long-term scientific potential of the cannabis plant. Once research into cannabis science is unleashed (assuming we can get the regulations in place to remain ahead of other countries), the cannabis industry represents a unique space in which U.S. companies can corner the intellectual property market.
That makes investing in the science of cannabis a unique proposition for investors.
Understanding the investment opportunities in the STEM of cannabis will come down to understanding the intellectual properties of the companies you’re looking to invest in, and how transferable they are to mainstream use.
As Greg Richter, founder of Revolution Micro, a company that designs and manufactures a wide variety of advanced components in-house for indoor grow facilities, argues: “Look for solid technology with the IP owned by the company you're investing in. Virtual products make virtual dollars -- you've got to have a solid product that solves a real problem, not a copy, a me-too, or something unique but not useful.”
Richter goes a step beyond Dr. Kuzdzal to suggest a rigorous, tactile vetting procedure for investors. “Have an engineer check out the product specs. More than half of our competitor’s website specs don't pass the ‘calculator test’ of simply cross-checking the spec sheet. Go see one. Touch it. Make sure they're not overdriving the chips to early failure. Due diligence in vetting tech investments usually requires some expert analysis, and it's worth it to know rather than assume and hope for the best.”
While you may not have the knowledge or ability to vet companies in this way, as the cannabis industry grows, and more people become experts—whether through experience or new academic programs—there will be more scientifically-versed advisors to help show you the way.
Lead image credit: ck.usembassy.gov
Andre Bourque is a cannabis industry connector, executive advisor to several cannabis companies, brand strategy advisor, and a cannabis industry analyst. In addition to Benzinga, Andre’s articles have been featured in Forbes, The Huffington Post, Entrepreneur.com, Yahoo Finance, CIO Magazine & ComputerWorld.
You can connect with him on LinkedIn, Twitter, and Instagram.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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