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I spent 20 years on Wall Street. Now I'm investing in marijuana

  • Marijuana is the fastest growing industry in our economy.
  • I live to find undervalued assets and many cannabis assets are cheap.
  • Legal marijuana sales reached an estimated $5.9 billion last year.
Marijuana
Andrew Caballero-Reynolds | AFP | Getty Images

Thirty years ago, most Americans could not tell the difference between a latte and a cappuccino. Then a little coffee shop in Seattle decided it was going to bring gourmet coffee to the masses and today Starbucks is a $22 billion company, McDonald's serves caramel mochas and 59 percent of coffee cups consumed daily in the U.S. are gourmet coffee.

Few could have predicted in the early 1980s that premium coffee would become such a bona fide phenomenon and a standard part of our everyday life. It proves the old adage "you don't know what you don't know." Nowhere is that truer than in today's booming cannabis industry.

This is what we do know. Medical marijuana is now legal in 29 states – West Virginia just joined the ranks, recreational use is legal in eight and about two thirds of Americans live in a state with some form of legal cannabis.

State legal sales reached an estimated $5.9 billion last year, and Wall Street analyst Cowen and Company predicts sales of $50 billion in the recreational market alone within a decade. This is the fastest growing industry in our economy.

I spent 20 years in asset management, most recently as chief investment officer of $115 billion of fundamental equity assets at BlackRock and was a member of its Global Operating Committee.

I live to find undervalued assets. Many cannabis assets in the private market are cheap relative to their business potential because while most acknowledge the huge growth in the industry, relatively few are willing to invest. It's a buyer's market.

Consider that state legal sales only account for about a tenth of the total cannabis consumed in the U.S., the rest is still illicit. As consumers gain greater access to government regulated marijuana products with mandated quality and safety standards, there will be very little incentive to buy pot from drug dealers. When was the last time you heard of someone buying moonshine?

"Marijuana is no longer about joints and bongs. Walk into a modern marijuana dispensary today in one of the more developed markets and you will see hundreds, if not thousands of product lines, and not everything is meant to get you high."

The threat of a federal crackdown is another known factor, but an often overestimated one. Despite the tough talk from U.S. Attorney General Jeff Sessions, there has been no official shift in policy from the previous administration's mostly hands-off approach.

Moreover, Congress has moved increasingly toward marijuana liberalization in recent years. The Rohrabacher-Farr Amendment, for example, currently prohibits the U,S. Department of Justice from prosecuting state sanctioned medical marijuana businesses – medical marijuana accounts for about three quarters of the state legal market.

This year, at least half a dozen bills have been introduced seeking everything from tax reform that legitimizes cannabis businesses to the outright end of the Federal Prohibition. The actions in Congress reflect shifts in popular views; surveys show a record number of Americans, 60 percent according to Gallup Poll, favor legalization.

So those are the knowns, but it is the unknowns, the discoveries and possibilities lying just beyond the horizon that make cannabis one of the most exciting investment opportunities of our lifetime.

According to Cowen and Company, about 32 million U.S. adults are regular cannabis consumers, but that number could grow to 50 million within the decade. The reasoning goes that as the substance becomes more mainstream and the stigma wanes, those who have tried it might become regular users.

Marijuana is no longer about joints and bongs. Walk into a modern marijuana dispensary today in one of the more developed markets and you will see hundreds, if not thousands of product lines, and not everything is meant to get you high. There are CBD-infused bath bombs and skin lotions, vaporizing pens, accessories, more edibles than the snack aisle of your neighborhood deli and even pet products.

From the investor standpoint, you would be hard pressed to find a more promising opportunity. This is truly a unique asset class. The relative lack of institutional capital creates a buyers' market. The valuations are some of the lowest you will see, and if you spot an opportunity early, as with any investment, you should see some handsome returns.

In the early 1990s, before most of us could imagine a global coffee shop chain, Starbucks was trading under $1 a share. The company's stock today is worth nearly $60.

Commentary by Chris Leavy, co-chairman and partner at MedMen, a leading cannabis firm based in Los Angeles. Mr. Leavy helps oversee the firm's investment strategy, bringing more than two decades of experience in asset management with senior roles at Morgan Stanley, OppenheimerFunds and BlackRock.

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