How to Invest in Pot Stocks Right Now

If you're looking to strike it rich with pot stocks, you need some patience.

The industry - while showing huge growth potential - is still limited in what it offers investors.

"Barring probably a couple of exceptions, the publicly traded space is probably one to avoid at this point," 4Front Ventures Co-Founder and Managing Partner Kris Krane told Money Morning. "It's just too volatile. There are too many shell games and reverse merger games, and it's not a great space to look at right now."

There just aren't a lot of legitimate investments in what is largely an over-the-counter market for pot stocks.

"Unless you are a pump-and-dump scammer, in which case you probably can make a good amount of money in the public markets in marijuana, it's probably best to avoid it at the moment," Krane added.

That's not to say pot stocks will never be a good investment, or that the industry is to be forever relegated to a playground for speculators and scammers. It just means that for now, you're better off sitting on the sidelines and waiting for a real player to emerge instead of taking your chances with risky bets.

There were a number of marijuana stocks that got a jolt last March when Washington first issued licenses to legal marijuana vendors in the wake of a public vote that made recreational use of the plant legal.

Cannabusiness Group Inc. (OTCMKTS: CBGI) soared as much as 1,600% on the month. GrowLife Inc. (OTCMKTS: PHOT) stock gained 111.8%.

All of that was short-lived hype.

Almost all of the pot penny stocks that spiked that March crashed shortly thereafter. And starting in spring, the U.S. Securities and Exchange Commission began getting suspicious. By summer, eight marijuana stocks had trading suspended.

But don't let that sour you forever on what could very well be a profitable industry in the years to come.

Here's the story behind pot stocks, and how you can make the most of what could be a $35 billion industry come 2020...

The Best Opportunities in Pot Stocks

So, where is the money in pot stocks?

Krane told us that while there isn't a whole lot of institutional money flowing to the cannabis industry, some of the more seasoned investors are going after the ancillary businesses - the "picks and shovels," Krane said.

He's talking about "the businesses that don't touch the plant - so the consulting businesses, point-of-sale businesses, delivery devices, smoking devices, and insurance companies that cater directly to this industry and cashless ATM businesses," Krane said.

He added, "All of these types of service businesses that you see in virtually any other industry - particularly any industry with a retail bend or an agricultural bend."

However, "there isn't as much money for direct-to-plant businesses," he said. Those are the businesses that will likely establish the type of brand names and profitability in this space when all is said and done and the industry does become more mainstream.

Unless you are an angel investor, or friends and family of a promising startup, it's going to be next to impossible to make a killing in this industry anytime soon.

Marijuana is still illegal at the federal level and the industry is still in its infancy, so institutional money isn't finding its way into the space in any meaningful way.

What is encouraging though is interest is starting to grow, helped along by a friendlier political environment for the use of the drug.

Privateer Holdings, for example, is a private equity firm that is seeking to make strategic investments in the cannabis industry. It received some millions of dollars from PayPal Co-Founder Peter Thiel earlier this year, which remains the highest-profile investment in the industry to date.

Krane also points out that the ArcView Group - an investor network that holds conferences each year to connect investors with entrepreneurs in the cannabis industry - is growing.

"Five years ago their events had 10 to 15 investors and maybe three entrepreneurs who were pitching. Now it's a two-day conference four times a year that gets 250 to 350 investors every conference," Krane said. "There's been a massive growth in the angel investor space."

But what's the point if as an individual investor you can't get in on this level?

Here's where you can look to start investing in pot stocks today...

How to Find the Best Pot Stocks to Buy

If you want to invest in pot stocks, you'll have to ask yourself a few questions.

"Do they have any assets? Do they have any clients? Do they have any cash flow? Is there a real business there or is it a company that a year ago was in a totally different sector and decided 'now we're in the marijuana business' so they could boost the value of their stock?" Krane said. "I would say that's probably more than 90% of the publicly traded companies out there."

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While Krane said publicly traded marijuana stocks are still risky, he identified AmeriCann Inc. (OTCBB: ACAN), a consulting company that helps marijuana businesses with large-scale cultivation and raising capital, and Terra Tech Corp. (OTCMKTS: TRTC), which owns dispensaries and cultivation centers in a number of states, as two of the more promising over-the-counter names.

But be warned, they are still risky in this marijuana investing environment.

For a profitable pot stock that's less risky, Money Morning Defense & Tech Specialist Michael A. Robinson has suggested GW Pharmaceuticals Plc. (Nasdaq ADR: GWPH).

"With its solid science, multiple uses for its main cannabis-based biotech product, and strong alliances with global drug leaders, GW Pharmaceuticals should leave investors richly rewarded," Robinson said.

Krane added that with GWPH stock, there isn't the same risk as with the less battle-tested names out there in the over-the-counter exchanges.

"GW is different because it's actually a pharmaceutical company," Krane said. "They would not consider themselves a marijuana business. They're a pharmaceutical company that's focused on harnessing cannabinoids and doing it according to standard pharmaceutical protocols. I think they're really an outlier."

Bottom Line: There's a lot of excitement within the industry about the promising growth the cannabis marketplace can bring to investors once the political hurdles are cleared. But that doesn't mean it's going to be easy to make a quick buck in the space, and finding winning pot stocks is going to be very difficult, if not impossible, at this stage in the game. You're better off letting the angel investors find the winners and then pouncing. But you don't have to miss out completely - there are already companies like GW that are harnessing the plant for purposes that won't come with the same legal complications or are not subject to pump-and-dump schemes.

Jim Bach is an Associate Editor at Money Morning. You can follow him on Twitter @JimBach22.

Pot penny stocks are not the best investment right now... This one company is a perfect example of the perils that come with trying to pick winners in an industry that has yet to take off in a meaningful way...