Everything you must know to buy stock in the booming cannabis industry—the smart way.
Do marijuana stocks live up to the hype?
You’re aware of the international buzz of the marijuana industry. You’ve heard the cannabis market could eventually churn out revenues similar to those earned by early investors of startups like Amazon. Maybe you understand that a small buy-in now could render significant results, or could potentially meet the hazards faced by any new venture.
You’re ready to see if investing in marijuana is the right decision for you. If you’re going to become an investor in the multi-billion dollar industry, you want to be set up for success.
This guide will prove that you don’t have to be seasoned in the stock world to invest with confidence. All you need is some time, a little bit of cash, and a dash of know-how.
The marijuana industry is relatively in its infancy.
Historically, marijuana has had two primary uses: medicinal and recreational. The same is true today, but it’s been illegal in much of the world for most of the last century.
Recent legalization in over 30 states in the U.S. and countless other countries has made a booming marijuana market at its relative infancy. Though most legalization is only for medicinal purposes, recreational use is also on the rise.
In the United States, marijuana remains illegal on the federal level. However, hemp was legalized in December 2018, which opens the door for various hemp-related assets to gain access to the national platform. Like marijuana, hemp is derived from the cannabis plant but lacks the same potency of tetrahydrocannabinol (THC), the main chemical in marijuana that provides a high.
Marijuana is not just rolled and smoked. Vapes, oils, edibles, creams, lotions, and infused beverages all ramp up its demand. The marijuana industry includes businesses which make and market these products for the recreational and medicinal markets.
If you’re going to invest, know the risks.
The cannabis industry is in a state of growth, but with that growth comes uncertainty. Many marijuana stocks are in their beginning stages, meaning the shares themselves are small and susceptible to price swings.
New marijuana companies may also be less likely to trade, making it more difficult for an investor to sell their shares when the time comes. And because the market is projected to make big profits, new investors might have to navigate inflated prices that reflect high expectations.
The marijuana industry will undoubtedly experience massive growth, but many companies won’t survive to become significant players. As a result, cannabis stocks still carry a high degree of risk in comparison with other agri-pharma industries.
There are two significant risks associated with investing in marijuana stocks: valuation and dilution.
Valuation estimates the worth of a share-based on all factors of a stock, including profit history, company structure, and projected growth. The most significant risk with buying marijuana stock is that valuations of these stocks have increased so rapidly that share prices outweigh the stocks’ growth prospects. Additionally, many marijuana stocks aren’t yet profitable, which provides a blind spot to experts assessing value.
Another risk in the process of valuation is that the projected growth of the marijuana industry partly relies on its legalization. Several major trade countries like Canada, Germany, Australia, and Switzerland have legalized marijuana. However, the United States is a leading player of international trade and has no clear plans to legalize federally under the current administration.
Dilution occurs when a company issues new shares to fund operations or growth. Without federal legalization, it can be difficult for marijuana companies to borrow directly from banks.
With limited options and expectations that their enterprise might snowball with the right resources, growing businesses are more likely to turn toward issuing shares as a way to survive.
To understand dilution, imagine you are a current shareholder of a company with a constant market. If the company has 1 million outstanding shares trading at $10 per share, it has a market cap of $10 million. If you own 100 shares, your investment is worth $1,000. But if the company doubles its shares by adding another 1 million, each share trades for $5 instead of $10, and your investment value is cut in half—only $500.
Work with—not against—the risks.
Because so much of the value of marijuana stocks are merely projected and involve companies just starting, it’s probably wise to treat them as speculative investments. In other words, don’t put in more than you can lose.
No single stock should ever make up the bulk of your portfolio. The same applies to investing in marijuana. Keeping your investments diverse by mixing different assets is key to success in the long run. If cannabis, like other types of investments, makes up just 10% of your record, you’re in a better place.
The marijuana industry has high-risk, high-reward propositions. The risks are already realized, but the rewards remain to be seen. By widely distributing your overall investment—regardless of your budget—you can reap the benefits of a risky investment if they materialize.
Choose the right marijuana stock for you.
An investment in a stock is an investment in a company or group of companies. There are three main kinds of marijuana companies:
1: Companies that grow marijuana. These companies do the cultivating, typically in indoor facilities, for medicinal and recreational use.
2: Companies that research marijuana for prescription drugs. Huge strides are being made in the biotech industry involving ingredients found cannabis. For now, the research remains for medicinal use.
3: Companies that provide products and services to the supply chain. Like any commodity, marijuana requires a long line of support to travel from the greenhouse to the consumer. This includes real estate, consultation, distribution, hydroponics, and packaging.
Although these categories have differing assets, it’s smart to ask a series of practical questions when determining which company is right for you.
What is the company’s financial history?
Research the management team, especially the track records of top executives. See if they had success in similar industries.
Is the company recreational or medicinal?
Although recreational marijuana companies are slated to be on the rise, only medical marijuana is typically generating current profits.
If a company is not currently profitable, research their plan to reach profitability and how they intend to fund their operation in the meantime.
How much product are they currently able to grow or access? How much is projected?
It’s important for an investor in any business to be able to compare the cost of production and the product’s selling price. Cannabis is an energy-intensive product, so these numbers might help indicate the sustainability of a company.
Companies may differ in the way that they plan to grow. Some might prefer to grow organically, while others might eye the competition with a focus on acquisitions.
What intellectual property do they own?
Recreational use has created an urgency to develop and patent new ways of growing, refining, and processing cannabis. Investors should look for companies that develop a technology that will be essential in future productions, and competitors will have to pay to use.
Intellectual property also indicates how the company plans to differentiate itself from its competitors. It’s predicted that only a few marijuana companies will be widely successful. Those who succeed will do so because they have something to offer that their competitors don’t.
Not all types of stock have the same risks.
There are two general types of stocks which apply to the cannabis industry: individual stocks and exchange-traded funds (ETFs).
Individual shares are tied to one company. First-time investors in marijuana might be drawn to the low cost of penny stocks, which are individual stocks valued at less than five dollars per share. Because the industry is at the beginning of its rise to legitimacy, many companies have limited cash and resources. As a result, penny stocks are fairly common.
However, penny stocks are most suitable for investors who have a high tolerance for risk. Their low costs indicate a high volatility that may result in a higher reward, but also might be lost in the wreckage of an unsuccessful company.
ETFs allow investors to have access to a large bucket of investments that are linked by a common trait. Each share grants its owner a proportional stake in the total assets of the fund.
ETFs act as a built-in diversification of an investor’s portfolio. Owning a single share will give investors exposure to the entire cannabis market. It will also ensure that an investment is healthy overall, even if a few individual stocks fail.
Another benefit of ETFs is that investors are often able to avoid paying taxes for their cut as long as they hold onto their shares. ETFs also lack the high management fees often associated with mutual funds.
ETFs are the safest way to go when investing in marijuana. They present a lower risk, give wider access to the market, and are cost-effective. They’ll also ensure that you aren’t left behind when the marijuana industry really takes off.
Choose companies that are well-established.
Although the marijuana industry is relatively new, there are already a few outshining companies worth mentioning.
Although Constellation Brands is known for its popular beers, it recently invested $4 billion in Canopy Growth. The duo is projected to top the industry.
Constellation Brands has an exemplary track record and ample resources. Canopy Growth has been a relatively long-time leader in the Canadian marijuana market and has an outstanding production value in comparison with its competitors. It’s a union that seems to suggest long-lasting success.
Innovative Industrial Properties
Innovative Industrial Properties is a real estate investment trust (REIT) that makes its profit by leasing properties to medical marijuana businesses. Because they lease to many customers, they provide diversification to investors.
REITs are required to distribute at least 90% of their taxable income to shareholders, and profits are projected to rise. The REIT model of Innovation Industrial Properties presents substantial benefits to investors who want to see profit soon.
KushCo Holdings is the leading supplier of packaging solutions to the U.S. marijuana market. Its focus on expansion has prevented profit up to this point, but the federal legalization of hemp and the success of its sales so far present a promising future. Hemp sales are expected to increase KushCo Holdings’ already skyrocketing sales.
OrganiGram Holdings provides medicinal and recreational marijuana, and has consistently posted profits in recent years. They also have the extensive supply agreements with both the Canadian government and private agencies across Canada. The company is also making international investments, which might secure its place on the global market.
Origin House is a distributor of cannabis products with a main focus on California, which has the biggest legal marijuana market in the world. Origin House is the biggest distributor in the state, and is looking to expand. After their recent acquisition of the major Canadian vape retailer 180 Smoke, it’s clear that Origin House is likely to continue to seek avenues of growth in the United States and beyond.
Stay smart about your investments.
As in any other field, it’s essential to stick to the basics when you’re a new investor in the marijuana industry.
Because the market has immense potential growth, it also presents significant risks. Many of the companies who are operating now won’t survive to reap their rewards.
To mitigate the risks of the marijuana industry but position yourself to have access to its growth, make sure your portfolio is diversified. One single stock should only make up about 10% of your overall record. Research the track records of the companies that you’re considering. Invest in ETFs, so that you’re likely to profit even when some companies fail.
Don’t let this critical moment pass you. With the right practices, you can become an investor in the booming marijuana market—without risking it all.