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  • Temper your excitement for pot stocks

  • By Pamela Yip
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  • By Pamela Yip
    The Dallas Morning News
    It was only a matter of time before this subject came up: What types of investment opportunities does the fledgling legalized marijuana industry offer?
    Whatever your position is on legalized marijuana, there's no question that this is an industry that's got many people seeing huge dollar signs for the future.
    In 2012, Washington and Colorado became the first states to approve recreational use of marijuana.
    "If it's legalized in a number of states, there certainly is a large potential for companies in this industry, whether you agree with it or not," said Brian Bruce, chief executive and chief investment officer of Hillcrest Asset Management LLC in Dallas. "If suddenly you have 10 states where it's legal, there's good revenue potential there."
    But before you take a toke investment-wise, remember that this is an infant industry that faces challenges.
    "When you're in that early stage before a company goes public, that can be very profitable. It can also be incredibly risky," said Gerri Walsh, senior vice president for investor education at the Financial Industry Regulatory Authority, which last year issued an investor alert for marijuana stock scams.
    One of the hardest things for many investors to do is to "separate the idea and the potential of that idea from the actual companies that you have to invest in," Bruce said.
    That's particularly true with some early-stage companies, he said.
    "You have to have a good company, but it's also got be a good investment," Bruce said. "It can have a good business and a good idea. You can love their products — but you can pay way too much for it."
    What's more, the companies that currently are in the marijuana industry are traded over the counter, and they've yet to make any money.
    "All of them are like this," Bruce said. "There's not a single analyst who follows any of them. Not a one of them seems to be making money, and a bunch of them don't even look like they have any revenue whatsoever."
    Said Walsh: "Particularly with these thinly traded companies that are not listed on national exchanges, there can be some serious risk because there's not a lot of information available about those companies."
    The marijuana industry faces many questions.
    "The fact that the regulatory environment is unclear is a consideration that investors should take seriously," Walsh said. "You can't legally sell marijuana under federal law. Federal laws don't permit what state laws are permitting, so there are some legal questions, both criminal and regulatory, that remain open at this stage."
    Also, banks remain reluctant to conduct transactions with legal marijuana sellers. That comes even though the Obama administration issued guidelines to banks to make them feel more comfortable working with marijuana businesses that are licensed and regulated.
    "First, Congress must change federal law, which bans the sale and distribution of marijuana," said Richard Hunt, chief executive of the Consumer Bankers Association. "Then, all federal regulators must provide clear and precise guidance. Until then, the nation's 7,000 banks will be highly reluctant to participate in this this new type of 'commerce.'"‰"
    All that hasn't stopped investors from getting high on the hype over pot stocks.
    "In monitoring the industry, we saw that around the first of the year, there was a particular surge in trading related to marijuana stocks in over-the-counter markets," Walsh said. "We were concerned that the market had become quite frothy and that people might be buying shares in these companies in a more speculative way that involves risk."
    Bruce advises investors to hold back and see how the marijuana industry does.
    "Wait until it develops," he said. "Right now, trying to pick which one of these companies may succeed is like back in the old days of the first personal computers. You probably would have put your money on Atari. They got out there and they had the biggest name. Where are they now? They're gone."
    Pamela Yip is a personal finance columnist for the Dallas Morning News.
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