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A marijuana leaf.

Investing in marijuana stocks may be a growth play for the long term, if you can stand the risk of getting burned in the short term.

It's not that you can't make money right now. While Canada's S&P/TSX composite index has risen nearly 5 per cent year to date, at press time, Hemp Inc. has surged 563 per cent, Advanced Cannabis Solutions Inc. has soared 423 per cent, Medical Marijuana Inc. has jumped 92 per cent and GW Pharmaceuticals Plc has gained 35 per cent.

But the legal, public offerings are currently mostly volatile penny stocks, and, aside from the privately held companies, a vast portion of the market is illegal. This looks to be changing slowly, as the move to legalize at least medicinal marijuana seems to be spreading worldwide.

The share prices have been propelled by the success of Colorado's move to allow retail sales of marijuana since Jan. 1, and the belief that a global shift toward greater acceptance of the drug will accelerate.

Although the 2013 World Drug Report by the United Nations says "cannabis remains the most widely used illicit substance," Uruguay in December became the first country to legalize its cultivation, possession, sale and use. In January, France joined Austria, Israel and Switzerland as countries that have approved cannabis-based prescription medicines, and new Canadian rules on medical marijuana take effect April 1.

"Colorado was such a smashing success that people saw this as real, and we're going to continue to move forward," says Douglas Leighton, managing partner at Boston-based Dutchess Capital Management II LLC, whose investments include marijuana companies. "A lot of people were holding their breath."

The legal market for cannabis in the United States alone could expand 64 per cent this year to $2.34-billion (U.S.), and 700 per cent to $10.2-billion over five years, according to cannabis industry research firm ArcView Market Research.

"Business is very good," says Robert Frichtel, president and chief executive officer of Advanced Cannabis Solutions, which rents out space to grow marijuana crops. He says he's watching as states including Massachusetts, Illinois, Florida and New York consider legalizing marijuana. "We are in the early stages of what's going to be a very large industry over time."

Investing risk

But most publicly traded cannabis companies are available in the United States as "pink-sheet," penny stocks with no financial standards or reporting requirements. Buying and selling their shares can be complicated. Brokerage analysts don't cover the companies and most money managers are barred from owning them.

And the U.S. Financial Industry Regulatory Authority warned investors of potential scams, given the rising interest in the industry.

Tranzbyte Corp., which owns dispensaries and nutrient-capsule makers, has swung from less than 1 cent (U.S.) to 3 cents this year. Medical Marijuana, which invests in companies that make chewing gum, shampoos and lotions derived from cannabis, soared 158 per cent in the first four weeks of the year, before plunging 21 per cent in the next two. At press time, it was at 30 cents.

"These are volatile stocks and highly speculative," says Stuart Smith, a spokesman for Medical Marijuana, which doesn't sell regulator-approved medicine. Considering the companies and regulations, and despite the passion of consumers about marijuana and the interest investors have in profiting from it, he says, "An investment in any marijuana stock in the United States today could be the most speculative play."

Alan Brochstein, a financial analyst in Houston who runs, says, "Everybody wants to get rich real quick, and that's not the best way to look at these companies. ... You need to think long term." (The "420" in the company's name is slang for marijuana.)

Of the 42 U.S.-traded cannabis-related stocks that Mr. Brochstein monitors, he says a quarter are probably scams and that he would consider investing in only eight of them, including breeding software company BreedIT Corp. of Israel, investment firm Full Circle Capital Corp. of the United States, and cannabinoid medicine developer GW Pharmaceuticals Plc of Britain.

Confusion about state and federal laws is another risk for both the companies and investors. Colorado and Washington have legalized marijuana and other states might, but growing, selling or owning it is still a crime federally.

"At any time, the Feds could come in and shut things down," says Steven Isenberg, chief executive officer at Toronto-based M Partners, an investment bank. "That scared away a lot of institutional investors."

Canadian opportunity

Tweed Inc., one of seven companies with a licence under Health Canada's new system, is setting up a plantation in Smiths Falls, Ont., southwest of Ottawa, and aims for an initial public offering on Toronto's TSX Venture Exchange in the middle of March, says Bruce Linton, the company's chairman. Toronto-based PharmaCan Capital, which invests in medical marijuana companies, aims for an IPO around April 1, says chief executive officer Paul Rosen.

Both Mr. Rosen and Mr. Linton, as well as Advanced Cannabis Solution's Mr. Frichtel, are striving to avoid being lumped in with the pink sheets, and to create a professional industry that respects the highest standards of reporting and transparency.

"It's a multibillion-dollar industry," Mr. Brochstein says. "These companies that people can buy right now are just a teeny, tiny fraction of the industry. They get a lot of focus because people can invest in them, but the reality is that better companies are going to be what you want to invest in. It's just a question of when they come."

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