Marijuana legislation is moving forward at a rapid pace, leading to a growing interest in the cannabis industry among investors. But are cannabis stocks all they’re cracked up to be? If current profits are anything to go by then yes, pot is set to deliver promising ‘high.’
Canada’s market alone is currently worth $30 billion, and assuming the U.S. and EU go down the same path towards complete legalization, the global market could rise to $194 billion by 2025, as reported by the Financial Post.
However, the US Marijuana Index showed a drop in stocks last year, which may have led many to wonder whether cannabis is still a wise investment.
The growth of the U.S Marijuana Industry
The legal U.S. cannabis industry is worth about $10.4 billion, and investments hit about $10 billion in North America last year, double the amount of the previous year. The prediction is that the industry will continue to grow at a similarly impressive pace.
While the market appears to be expanding, this doesn’t necessarily mean that marijuana stocks will deliver good returns across the board. As the industry is still in its infancy, production problems and rising competition could instigate a fall in stock prices. Other challenges such as insurance, banking issues, and federal legalities (marijuana is still illegal under federal law) could impact stock prices.
Although, as more states legalize medical marijuana, more patients are able to purchase marijuana legally, contributing to the boom in investment interest.
Types of Marijuana Stocks
If you’re not already familiar with marijuana, you may be pleasantly surprised to learn that there is a diverse array of cannabis products with investment potential. Investors are not limited to growers and retailers. There are numerous companies that manufacture cannabis-based products and provide ancillary services. For example, you may want to consider adding a company that produces topicals and edibles to diversify your portfolio.
Let’s take a quick look at the different investment options currently available in the cannabis industry.
The U.S. Food and Drug Administration (FDA) has approved two drugs (Marinol and Syndros) containing a synthetic version of tetrahydrocannabinol (THC), known as Dronabinol. THC is the major psychoactive cannabinoid produced by the cannabis plant. These drugs are prescribed for the treatment of anorexia associated with HIV/AIDS and prevention of nausea and vomiting in chemotherapy patients. Dronabinol is trademarked by Solvay Pharmaceuticals and is sold by PAR Pharmaceutical Companies.
More recently, the FDA approved the first non-synthetic cannabis-based drug, called Epidiolex, for the treatment of two severe forms of severe epilepsy, including Lennox-Gastaut syndrome and Dravet syndrome. The anti-seizure medication contains cannabidiol (CBD), a non-psychoactive cannabinoid extracted from the cannabis plant.
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Epidiolex is produced by GW Pharmaceuticals (GWPH), a British pharmaceutical company which focuses on research, development, and commercialization of cannabinoid prescription medicines. GW Pharmaceuticals also makes another non-synthetic cannabis-derived drug, called Nabiximols, which contains CBD and THC cannabinoids. Nabiximols (sold under the trade name Sativex) are nasal sprays approved in the United Kingdom to treat spasticity (muscle stiffness and spasms) associated with multiple sclerosis.
However, keep a close eye on the market as there have been clues that AbbVie (ABBV), a Chicago-based biopharmaceutical company founded 2013, may acquire companies, like GW Pharmaceuticals.
Extracts are one of the fastest growing segments in the industry. Commonly sold as oils, waxes, and even glass sheets, extracts are a concentrated form of cannabis extracted from the marijuana plant. These products represent a growing trend as certain cannabinoids can be isolated from others. For example, CBD can be isolated from THC to create a non-psychoactive oil used solely for its therapeutic benefits. Furthermore, extracts are widely accepted with the public as a more discreet alternative to vaping or smoking, which may represent a larger potential market.
Lucrative investment opportunities exist in companies that provide extraction machinery and equipment, such as Waters (WAT), or big players in cannabis extraction, such as CannaRoyalty.
Dispensaries are essentially retailers. There are two different types: recreational marijuana dispensaries and medical marijuana dispensaries. The later only exist in certain countries and U.S states where medical marijuana has been legalized.
MedMen (MMNFF) is one of the biggest retailers in the U.S with over 16 stores operating nationally. The prosperous company purchased PharmaCann in the fall of 2018 and has been on the radar on savvy investors since. Another fruitful avenue to keep your eye on is the e-commerce cannabis market, especially with cloud companies, like Shopify jumping in the game.
Packaging and Marketing
Let’s face it. Weed doesn’t have the best of reputations—historically speaking. The cannabis industry must contend with firmly held beliefs concerning the dangers of marijuana, and despite growing acceptance, will need to work hard to change public perceptions. It’s fair to assume retailers will spend big dollars on cannabis packaging, marketing, and branding to give weed a fresh face.
KushCo Holdings (formerly Kush Bottles) is the largest supplier of packaging and branding products (bottles, bags, containers, etc.) with global distribution. The company has facilities in the U.S and Canada and has forecast $110 to $120 million in sales for 2019 (121% year-over-year growth).
Growers may be situated indoors, outdoors or on farms. At this level, the product is traded along the same lines as other agricultural commodities. Some top players to keep your sights on include Canopy Growth Corp (CGC) and Aurora Cannabis (ACB).
Aurora Cannabis is currently one of the biggest licensed medical marijuana producers in Canada with sales and operations in 22 countries. The company acquired privately held Whistler Medical Marijuana earlier this year, and it’s predicted they’ll be looking for more deals in 2019.
Distributors are the middle man between growers and dispensaries. If you’re considering investing in a distributor, you need to “hash out” the good from the bad.
An up-and-coming distributor is Terra Tech (TRTC), a diversified agricultural company with operations in production, dispensing, and distribution as well as the sale of hydroponic equipment. The company operates in the State of California and, in its latest earnings report, declared revenues of $8.6 million for the quarter ending March 2018.
Where to Buy Marijuana Stocks
If you’re looking to invest in marijuana stocks, the best place to go is the Marijuana Index. Pay attention to the bigger Canadian companies as well as other countries such as Germany which have big markets and medical marijuana.
U.S. citizens can purchase stocks from brokers; however, some may be over-the-counter (OTC) stocks which means that they aren’t traded in the global exchange networks. American investors may be limited because the OTC market is regulated and physically traded stock spreads tend to be broader, which means that they are riskier.
Remember that as a U.S. resident, there is also the option of investing in various legal ancillary products like pharma and biotech. U.S. companies may not be on the NASDAQ yet, but plenty of other industries are taking advantage of this booming industry. You can also check Canadian exchanges like the TSE.
Top Stocks to Watch Out For
With impending legalization, U.S. marijuana sales will likely head into the tens of billions in the next several years. Keep an eye out for alcohol producers like Molson and Heineken who are joining forces after facing direct competition against their pot-enthused beverages.
Hydroponics companies such as Scotts Miracle-Gro (SMG) are another example of a company benefiting from the increasing demand for cannabis. The company also has the advantage of operating legally within the U.S., the largest marijuana market in the world.
Investors looking for other options might want to turn to biotech companies, like Cara Therapeutics (CARA) or Axim Biotech (AXIM), which manufacture drugs for pain, though it’s worth noting that cannabis-based drugs are still in clinical testing phase for both companies.
What Happens Next?
One problem with investing in marijuana currently is that Wall Street doesn’t have specific metrics for measuring cannabis, so it may be worthwhile to wait for it to become more formalized before investing. Another problem with US-based investing is that regulation differs between states, which could be disruptive to markets.
However, recent statistics suggest industry growth should continue to be positive, which means that a cautious long-term investment should be relatively low-risk.