With the gradual legalization of marijuana in the United States, there has been increased curiosity in public marijuana companies. While the speed and pervasiveness of new legislation remain unclear, there are already ways to start investing in marijuana stocks should that fit your investment strategy.
What states have voted to legalize marijuana?
As of Nov. 2019, more than 30 states have passed laws that broadly legalize marijuana in some use. Marijuana has been made legal for recreational use in Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, Washington, and Washington D.C.
What are the differences in marijuana products?
There are many different marijuana products ranging from recreational and medicinal goods to various methods of ingestion, as well as a cornucopia of auxiliary services ranging from growth to packaging.
Where are marijuana stocks listed?
Since 2018, both the New York Stock Exchange and the NASDAQ have had pure cannabis companies listed. The first cannabis company to make its debut on the NASDAQ was the Cronos Group, and the first company to debut on the NYSE was the Canopy Growth Corp. At the time of publication, many cannabis companies are penny stocks, which are primarily traded on over-the-counter (OTC) markets. Penny stocks inspire skepticism and heighten risk perception on the part of investors.
What are the differences in marijuana stocks?
There are as many marijuana stocks as there are marijuana goods and services.
Cannabis growers and retailers
These companies grow cannabis in indoor facilities and greenhouses. They also harvest crops and distribute the finished goods to customers. Some also have brick and mortar shops that distribute marijuana for both medical and recreational purposes.
Cannabis-focused biotechs
The bread and butter of the cannabis biotech sector is the research and production of new drugs and goods that make use of cannabinoids, which are the active compounds within cannabis. This sector is expected to continue its growth given all the companies, governments, and universities worldwide that are doing research into this growing field.
Providers of ancillary products and services
These are companies that provide tools for cannabis cultivators. They include hydroponics, lighting systems, packaging, and management.
What are the risks of investing in marijuana stocks?
Marijuana is a fledgling market carrying a variety of risks that stem from the uneven pace of its legalization. Rather than a nationwide rollout, marijuana is being decriminalized piecemeal, leading to great confusion and the potential for sudden government intervention.
Legal risks
Given that marijuana is still illegal at the U.S. federal level, there’s always the risk of the Justice Department just coming down hard on marijuana businesses, even in states where marijuana is legal.
Political risks
Along with legal risks, there are political concerns when it comes to marijuana. The Trump Administration, for example, often appears to be driven by a desire to reverse course on any gains made by the Obama Administration, placing much of the marijuana industry into a state of uncertainty.
Supply and demand risks
Plenty of marijuana stocks have high valuations because big-time growth is assumed to be right around the corner. However, if there’s too much supply, particularly in Canada, this could impact the valuation of cannabis businesses overall.
In Canada, companies have been growing marijuana in great abundance, but there’s only so much pot that the market can absorb. At current rates, it is possible that there could be a surplus, which means that prices, revenue, and stock prices could drop. Luckily, the global demand for marijuana is expected to grow. The one big risk is that global demand won’t be able to keep pace with overabundant growth, doing nothing to affect the glut.
Over-the-counter (OTC) stocks
Stocks traded on major markets have to adhere to regulations and maintain minimum market caps, which is the term for the value of shares. Stocks traded over-the-counter don’t have these requirements and, as a result, are riskier investments. Currently, many marijuana stocks are only available OTC.
What to look for in a marijuana stock?
Despite the unique legal status of marijuana, it should still be treated like any other investment that should be approached with end objectives in mind.
Investors interested in marijuana stocks should also be prepared to do their research. Study the management team, its growth strategy, and its financial status. If the business has yet to be profitable, then study its cash on hand. If the company needs to raise money by affecting its stock offering that may dilute the value of existing stocks. Given the likelihood of a supply glut in Canada, check to see if the companies have deals in place with other nations, such as Germany.
What trends influence marijuana stocks?
Prognosticators view marijuana as a potential game-changer that can challenge established alcohol and pharmaceutical brands. There’s also an opportunity for cannabis to find its way into many pre-existing products as a popular supplement.
What are the top marijuana stocks?
Despite being a fledgling industry there are already marijuana companies with great potential and with tremendous achievements under their belts.
Canopy Growth
With its experienced management team and massive growing operation, Canopy Growth has the biggest market cap for a reason. Its ten facilities span more than 4 million square feet of growing space. Further, the company has recreational agreements with all ten Canadian provinces, and it has a strong footing in the international market, operating in 15 countries worldwide.
Canopy Growth also has a major partnership with Constellation Brands, a massive alcoholic beverage maker. The company isn’t profitable yet, but that’s mainly because it’s still heavily investing in its expansion.
GW Pharmaceuticals
GW Pharmaceuticals holds the honor of being the first biotech company to win FDA approval for a cannabis-based drug. While there’s considerable debate as to how successful the company will actually be, some pundits believe that the company’s peak may be as high as $1 billion.
The company’s management is also impressively stocked with executives who have at least two decades of pharmaceutical experience, particularly in the arena of launching new products. For example, GW’s multiple sclerosis drug Sativex is approved in 25 countries outside the U.S. While still not profitable, the company has plenty of cash on hand to maintain its growth.
Scotts Miracle-Gro
Scotts Miracle-Gro has the distinction of being the leading provider of hydroponics products to marijuana producers. While the company holds a debt of nearly $2 billion, this debt is the result of its expansion efforts and the company has committed to reducing this debt. Scotts also has the advantage of being a successful company outside of the marijuana arena; as much as 90% of its profits come from lawn and garden products.
Horizons Marijuana Life Sciences ETF
This ETF invests heavily in three of the aforementioned recommended companies, so it’s no wonder it earns a recommendation in and of itself. It has a high expense ratio relative to many other ETFs, which lends credence to the strategy of investing in the stocks individually. If you’re looking to diversify within the marijuana sector, you might consider Horizons as your pick.
What are marijuana stock fundamentals?
Like any stocks, the potential for strong growth is an important factor for consideration. As of right now, the marijuana industry is collectively losing money, but that’s because it’s an industry still in its earliest stages.
What are marijuana stock technicals?
Composite Ratings are a broad assessment of a company’s success, including its profits and technical specifics. If the company you’re studying has a composite rating greater than 90 then it’s generally considered to be a good investment.
Given the fledgling nature of the industry, many marijuana stocks have a composite rating of less than 30. The one exception is Innovative Industrial Products, which has a rating of 96 as of Sept. 2019. IIP provides real estate capital to the medical-use cannabis industry.
Where can you buy marijuana stocks?
Marijuana stocks can be purchased on public exchanges, although riskier options are also available over the counter. The investing app Public, for example, offers curated themes of stocks, including “Cannabis.”
Bottom line
Marijuana is still a fledgling industry, which means that assumptions about its promise should be balanced with concerns about its risk. For those who take a studious approach, marijuana may prove to be a fruitful investment. For casual observers, marijuana will remain an oddity until it matures into a commodity.