Is there a safe way to invest in the marijuana industry?

You’d have to think so, given that legal marijuana is poised to become common in Canada and the 36 U.S. states that have legalized medicinal or recreational pot.

Already well established in healthcare, weed could also become a household staple, as familiar as bottled water and bread.

What follows are major risk factors for investors in this nascent industry, dominated so far by large Canadian firms; and a look at four of the biggest speculative pot stocks, some highly speculative stocks, and a few of the low-risk investments in the sector.

Risk factors

1) The pot bubble: The boom in pot stocks has been described as a “massively euphoric bull market” and “the runaway train of Canadian cannabis.”

For now, almost all marijuana stocks are too pricey to qualify as long-term investments. One example: The stock of Markham, Ont.-based MedReleaf Corp., an industry leader in sales, product quality and new-product development, commands a ludicrous trailing price-earnings multiple of 1,074. By contrast, the p-e for Apple Inc. shares, often described as overvalued, is a comparatively modest 19.

2. Political interference: Pot is acutely vulnerable to abrupt government actions. Stocks in marijuana companies tumbled early this year when Jeff Sessions, the U.S. attorney general, appeared to declare war on pot use.

Actually, the U.S. lacks the resources for a crackdown on recreational pot users. And the U.S. medicinal market is effectively protected by Congressional sanction.

However, pot being illegal at the U.S. federal level, marijuana firms with U.S. assets are at risk of those assets being seized at any moment by U.S. federal authorities.

The Toronto Stock Exchange is examining the possibility of delisting pot companies with U.S. assets unless the exchange can be satisfied that the firms are not violating U.S. law.

That puts in question both the listing status of TSE-traded pot firms with U.S. assets, and the assets themselves. Pot companies with all of their production in Canada would seem the safer investment.

In its offshore operations, the industry tries to be in the marijuana business, but not of it. That has the major Canadian pot firms taking care to strike alliances with U.S. and European partners, rather than having direct ownership of pot inventory subject to government confiscation.

3. Too much competition: Even at a projected size of $27 billion by 2021, the North American legal marijuana industry won’t be big enough to support the staggering number of publicly traded pot firms, 259 at latest count. (All figures in Canadian dollars.)

An epic shakeout is in store, in which the industry consolidates around a handful of the strongest players. That means investors in most of today’s pot firms are set to lose some money, as scores of undercapitalized marijuana start-ups are outmuscled by the few biggest firms. And eventually Big Tobacco and Big Pharma will be drawn into the mix, with their massive resources.

Total 2017 revenue for the pot industry’s four biggest firms, all Canadian, was about $119 million. That’s a microscopic sum compared with the R&D budget alone of just one Big Pharma giant, Merck & Co. Inc. ($12.5 billion).

Leading speculative pot stocks

Canopy Growth Corp., based in Smiths Falls, Ont., is the world’s largest publicly traded pot firm, measured by its $7.6-billion market valuation. The firm is roughly tied with MedReleaf in its industry leading $39.8 million in 2017 sales. Owner of the industry’s best-known brand (Tweed), Canopy also exports dried cannabis products overseas. And it has the backing of top U.S. liquor firm Constellation Brands Inc., which last year bought about 10 per cent of Canopy’s equity as a hedge against pot’s likely weakening of wine and beer sales.

Vancouver-based Aurora Cannabis Inc., is an industry leader in state-of-the-art cultivation facilities, which keep its growing costs low. As a hedge against the slow pace of U.S. pot legalization, Aurora has a permit to sell cannabis to German pharmacies.

Aphria Inc., based in Leamington, Ont., is among the few big players to have achieved profitability, posting total earnings of $4.6 million in its past two fiscal years. A concern with Aphria is that with some operations in the U.S., it is among the cross-border pot firms that could find itself in the crosshairs of U.S. authorities, as noted above.

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MedReleaf, also profitable, has a strong base in high-quality medicinal marijuana, and sells extracts and cannabis oils that command high profit margins.

Highly speculative pot-related stocks

Some biotech firms are developing cannabinoid drugs which, if they pass clinical trials, could be strong sellers in treating neurological and other disorders. Leaders in the field include GW Pharmaceuticals PLC of Cambridge, England, and Cara Therapeutics Inc., of Stamford, Conn. The risk here is that the shares of these firms have been hyped to the skies, on the dicey prospect that their products under development will pan out.

Low-risk pot-related stocks

Scotts Miracle-Gro Co., of Marysville, Ohio is a $3.2-billion (sales) market leader in the North American lawn-care and garden business. A significant upside for the firm is the specialized soil and plant nutrients it sells to a burgeoning marijuana industry.

Constellation Brands, another blue-chip, anchored by its popular Corona beer and Robert Mondavi wines, is a safe play on marijuana with its approximately 10 per cent stake in industry leader Canopy Growth.

And by way of subsidiary Shoppers Drug Mart, Loblaw Cos. Ltd., is angling to be a major pot retailer, with its 2,400 or so stores across Canada. Pending federal approval of Shoppers’ pot-retailing applications, the firm has already signed up both Aphria and MedReleaf as marijuana suppliers.

Bottom line

The pot industry is still fraught with enough uncertainties to dissuade the cautious investor.

It’s true that some speculative investors who have been lucky in their timing have made a bundle on the swings of these volatile stocks.

But for the investor who lacks expertise in market timing – and Warren Buffett says expert market timers don’t exist – patience is required until these stocks come down to Earth, and homework, as well, in selecting only those firms with a record of consistent success.

If the trajectories of the auto, beer and information technologies industries hold a lesson, it’s that five years from now a mere handful of giant firms will dominate the global marijuana business. And, remarkably enough, given the vice-squad aura of pot until recently, those few winning firms will be stocks for widows and orphans.

But trying to guess now which of the hundreds of wannabes will earn that distinction is like playing leapfrog with a unicorn.