How to Invest in Cannabis and Legal Marijuana Stocks

Legal Marijuana sales are growing at a fast rate across the globe. According to GrandViewResearch, the legal Cannabis market will reach $73 billion by 2027. That's an impressive 18.9% CAGR so investors will surely want to own a piece of that pie.

The Coronavirus Pandemic actually provided a boost to the marijuana industry because consumers began stockpiling the plant just like food, water, medicine, etc. Cannabis sales are soaring throughout the USA and Canada during the current crisis.

Have we seen the bottom for Cannabis stocks? This could be the buying opportunity of a lifetime.

In this guide, you'll quickly learn the basic ins and outs of the Cannabis industry and how you can profit from oversold Cannabis stocks that will be worth a lot more in the long run.

Types of Cannabis Products

There are basically 3 different types of Cannabis related products:

  1. Medical Marijuana
  2. Recreational Marijuana

Medical Marijuana

Also referred to as medical cannabis, medical marijuana currently is broadly legal in 33 U.S. states plus the District of Columbia, and in over 30 countries. A prescription from an authorized healthcare provider typically is required for patients to obtain medical marijuana. Patients receive prescriptions to help treat anxiety, depression, pain, and stress.

U.S. Medical Marijuana Market, By Application, 2013 – 2024 (USD Billion)

Medical marijuana can be inhaled either by smoking dried flower, or vaping concentrates. It can be consumed via edible products that contain marijuana or cannabis-infused beverages. There are even topical creams and lotions containing marijuana or chemical ingredients from cannabis.

One of the most commonly used medical marijuana products is cannabidiol (CBD), which is among many chemicals in the cannabis plant known as cannabinoids.

CBD doesn't have the psychoactive properties of another important cannabinoid, delta-9 tetrahydrocannabinol (THC), but appears to offer several potential health benefits. In June 2018, the U.S. Food and Drug Administration (FDA) approved the first CBD-based drug, Epidiolex, for treating two rare forms of epilepsy, Dravet syndrome and Lennox-Gastaut syndrome (LGS).

The FDA has approved three THC-based drugs — Marinol, Cesamet, and Syndros — for the treatment of chemotherapy-induced nausea and vomiting. Marinol and Syndros also received approval for treating AIDS-related anorexia. However, all three drugs are manufactured using synthetic THC rather than compounds from marijuana plants.

Recreational marijuana

Eleven U.S. states plus the District of Columbia have legalized recreational marijuana for adult use so far. Uruguay legalized recreational weed at the national level in 2013. The Canadian parliament voted to legalize recreational marijuana, and that market opened for business in October 2018.

As you might expect, users of recreational marijuana products tend to prefer the psychoactive attributes of THC. Smoking cannabis flower is the most common method of use in key U.S. states that have legalized recreational marijuana. However, vaping concentrates and consuming cannabis edibles have grown in popularity.

Types of Cannabis Stocks

Just like there are different types of marijuana products, there are different types of marijuana stocks. There 4 main types are:

  1. Cannabis growers and retailers: These companies grow Cannabis, harvest the crop, and sell products to their customer base. They can also open brick and mortar retail stores or accept orders online. Examples: Canopy Growth (NYSE: CGC), Aurora Cannabis (NYSE: ACB),
  2. Cannabis Biotech Stocks: These biotech companies focus on producting Cannaboid-based drugs.
  3. Providers of Related Products/Services: These companies provide marijuana growers with essential products like lightning systems
  4. Marijuana REITs: These companies lease out land to Cannabis growers and make money from a triple-net lease contract. Examples: Innovative Industrial Properties (NYSE: IIPR)

What to Look for as an investor

Since legal Marijuana is such a brand new industry, I'm looking for companies with lots of revenue growth and new, exciting products that customers love to buy.

Research the Company's Products & Financial Strength

Research each company's management team, revenue numbers, and cash position to uncover the best Cannabis stocks. Many companies aren't reporting a profit yet so you can use metrics like Price to Sales Ratio (P/S ratio) instead of P/E ratio to compare companies.

In these current market conditions, I recommend paying attention to companies who are desperate to raise cash throgh additional stock offerings (dilution of your shares is not a good sign). These companies tend to put a strain on stock prices in the long term. Borrowing money is a better remedy to a cash-liquidity problem because the company has time to pay down the debt before the loans reach maturity.

Key Metric: Cash Cost Per Gram

Cash cost per gram is a key metric to determine how efficient a Cannabis grower produces crop excluding amortization, packaging costs, and inventory adjustments.

Monitor Warrants

In addition, research how many warrants and convertible securities have been issued by the company. Warrants give investors an option to buy shares in the future. Convertible securities can be converted in the future into shares of common stock; for example, convertible debentures start off as loans, but can later be converted into stock. A high number of warrants or convertible securities could mean that the stock will be diluted in the future, potentially causing the share price to drop. Some Canadian marijuana growers have used these methods of raising cash extensively.

3. Top Cannabis Stocks & ETFs

Below is a list of top Cannabis stocks & ETFs. This is more of a broad list that I put together. Check out this article for the best Marijuana stocks.

Cannabis Growers & Retailers

CompanyMarket Cap
Canopy Growth (NYSE: CGC)$4.97 billion
Cronos Group (NASDAQ: CRON)$2.14 billion
Green Thumb Industries (OTC: GTBIF)$1.23 billion
Aurora Cannabis (NYSE: ACB)$1.16 billion
Tilray (NASDAQ: TLRY)$946 million
Aphria (NYSE: APHA)$848 million
Charlotte's Web Holdings (OTC: CWBHF)$469 million
Cresco Labs (OTC: CRLBF)$588 million
HEXO (NYSE: HEXO)$303 million
Organigram Holdings (NASDAQ: OGI)$335 million
Auxly Cannabis (OTC: CBWTF)$169 million
Medical Marijuana (OTC: MJNA)$104 million
Stock Data updated as of 3/30/2020. Source: Yahoo! Finance

Cannabis Biotech Companies

CompanyMarket Cap

GW Pharmaceuticals
 (NASDAQ:GWPH)
$2.72 billion
Cara Therapeutics (NASDAQ: CARA)$588 million
Corbus Pharmaceuticals (NASDAQ: CRBP)$376 million
Stock Data updated as of 3/30/2020. Source: Yahoo! Finance

Related Providers

CompanyMarket Cap
Scotts Miracle-Gro (NYSE:SMG)$5.7 billion
Neptune Wellness Solutions (NASDAQ: NEPT)$119 million
KushCo Holdings (OTC: KSHB)$87 million
Stock Data updated as of 3/30/2020. Source: Yahoo! Finance

Cannabis REITs

CompanyMarket Cap
Innovative Industrial Properties (NYSE: IIPR)$1.37 billion

Understanding Risks

Investing in marijuana stocks does carry some risk due to the unique issues surrounding the industry. Here's a list of some risk factors to watch out for:

  • Legal & Political Risks: Legal marijuana remains illegal at the U.S. Federal level, meaning U.S. states have passed state-level laws to allow legal Cannabis sales. The House Judiciary Committee approved a bill legalizing marijuana on the federal level but it's not been signed by the House or Senate yet.
  • Competition from Recreational Sellers: The global Cannabis industry is still young and many companies are blowing through money while trying to increase sales. Not only do legal Cannabis growers have to compete with each other, but the price of Cannabis sold by recreational sellers is lower than legal sellers (due to things like taxes, staff, etc). The good news is global demand will definitely increase in the long term, meaning the best companies should rise to the top.
  • Over to Counter (OTC) Risks: Some Cannabis stocks are traded on the OTC instead of a major stock exchange like the Nasdaq or NYSE. These OTC stocks carry added risk because they aren't required to report detailed financial statements or maintain a minimum share price and market cap. While there are several Cannabis stocks on the NYSE & NASDAQ, the problem is many of these companies are Canadian and you'll have to buy OTC stocks for most U.S Sellers. Also, some brokers don't support OTC stocks so be sure to choose a flexible broker to buy shares.

Invest Carefully

If you bought marijuana stocks back in 2019, chances are you bought your shares during the big price meltdown. Cannabis stocks lost a ton of value after much of the hype cooled off. Some of these stocks were trading at market caps far above the intrinsic value of the company.

When investing in Cannabis stocks, you're better off building up a position over time to get a lower cost per share. Buying over time reduces risk and gives your investment time to perform better and grow.

You'll also avoid the common mistake of buying a large position at a high price then being forced to sell near the bottom after suffering heavy losses. A good strategy is to use dollar cost averaging by purchasing a specific dollar amount every week/month. You'll get more shares when the price is lower and fewer shares when the price increase.

If you only have $1,000 to invest then consider investing in a Cannabis ETF to simply everything. Or you can pick 2 or 3 marijuana stocks and put an equal amount in each one. Lastly, some investors choose to go all-in on one stock but that strategy carries a lot of extra risk. Tread carefully.

Monitor Industry Changes and Legistlation

The biggest obstacle to growth of the Cannabis industry is legalization at the U.S. federal level. This will open the floodgates for legal Cannabis sales and reduce the stigimization of the overall marijuana industry. With more relaxed laws, recreational sellers will lose their appeal and more people will feel comfortable buying through legal, licensed sellers.

In the long term, global Cannabis sales will increase a lot so it makes sense to be patient and think long term as a Cannabis stock investor. Most of these companies are trading at just $1 billion market caps.

FAQ

Would it be wise to invest in medical marijuana stocks?

I think so. 2019 was a brutal year for marijuana stocks but things are looking much better in 2020. Many companies are currently trading at $1 billion dollar or lower market caps. This is a great opportunity to build a solid portfolio while the industry is young.

Are marijuana stocks a good long term investment?

Absolutely. Global sales are expected to grow at around 18% annually throughout 2027. If you buy some marijuana stocks now, your shares could pay massively in the future.

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