Business Is Booming: What States Will Make From Marijuana Legalization
Uruguay was the first country to fully legalize recreational cannabis use in 2013. But with just over 3.3 million people and its faraway location, this did little to spark investor interest. It was only when Canada moved toward legalization that investors flocked to cannabis equities.
Canada and Uruguay are the only countries to have legalized recreational cannabis, although Mexico’s legalization is anticipated in 2021. Contrary to popular belief, recreational cannabis has not been legalized in the Netherlands. Despite Holland’s reputation for tolerance, laws remain regarding how much cannabis one can carry and how many marijuana plants a citizen can grow.
In the U.S., 35 states and the District of Columbia have legalized marijuana for medical purposes. Fifteen states and the District of Columbia have legalized marijuana for recreational use.
Though American cannabis firms exist, marijuana remains a Schedule I drug in the eyes of the Drug Enforcement Agency. This places it in the same class as heroin, ecstasy and LSD. The DEA defines the transport of marijuana across state lines as drug trafficking. Hence, the states with legal marijuana must operate markets within their state only. This has dramatically hampered U.S. marijuana companies.
Despite that, the trend toward legalization for both medical and recreational use continues. The 2018 Farm Bill legalized a form of marijuana known as hemp, a close cousin of the THC-based psychoactive form of cannabis. Thus, companies now have considerable leeway to manufacture and sell hemp-based cannabidiol, often referred to as CBD, legally.
- Understanding the Risks of Investing in Cannabis Stocks and ETFs
- Top Cannabis Stocks To Consider
- Top Cannabis ETFs To Consider
- Why Should You Consider Investing in Cannabis?
- How To Invest in Marijuana Stocks
- What To Look for in a Marijuana Stock
- Be Smart With Your Cannabis Investments
- Keeping Up With Cannabis Stocks
- Are Marijuana Stocks for You?
Stock investing in the marijuana industry brings with it both volatility and limitations not found in other sectors. The fact that the world’s top marijuana companies are all based in Canada might surprise some investors. Due to continuing restrictions on marijuana, investors have shied away from equities in other countries. In the U.S., nearly all marijuana companies trade on over-the-counter markets for this reason.
Moreover, due to high demand, many of the best weed stocks trade at a massive premium. Many recall that Tilray shot as high as $214 per share in September 2018, after pricing its IPO at $17 in July 2018. Today, more than two years after legalization, it has fallen to $8.26 as of year-end, 2020. Hence, high levels of volatility remain a danger.
Despite continued restrictions on marijuana in the U.S., numerous marijuana companies came on the scene to meet demand. As previously mentioned, most of the larger firms are Canadian. But a few American companies have found success circumventing Schedule I restrictions. As the industry continues to grow, several equities stand out as warranting investors’ attention.
|Notable Marijuana Stocks — At a Glance|
|Stocks||Ticker||Why Investors Like It|
|Canopy Growth Corporation||CGC||
Charlotte’s Web Holdings
|Innovative Industrial Properties||IIPR||
Canopy Growth Corporation (CGC)
Many regard Canopy Growth (CGC) as the market leader due to an early investment by Constellation Brands (STZ). The alcohol giant paid $4 billion for a 38% stake in the Smiths Falls, Ontario-based company.
Why Investors Like It: Although Constellation Brands’ investment has led to some turmoil — Constellation forced out founder Bruce Linton in July as losses mounted — the company remains well-positioned. Moreover, as soon as marijuana becomes legal at the federal level, Canopy will acquire Acreage Holdings (ACRGF), giving it an immediate segue into the U.S. marijuana market. Additionally, in 2020, Canopy was able to restructure its deal with Acreage to reduce the cost from $3.4 billion to about $843 million.
Charlotte’s Web Holdings (CWBHF)
Investors could also invest in cannabis stocks through the hemp industry. One of the more prominent firms in this space is Charlotte’s Web Holdings (CWBHF), which produces and distributes hemp-based CBD products. The company reports that consumers can find its products across 22,000 different retail locations.
Why Investors Like It: CWBHF stock currently trades over the counter — so it’s not subject to some of the requirements imposed by mainstream stock markets — and free of Schedule I restrictions. And unlike most marijuana stocks, Charlotte’s Web earns a profit.
Innovative Industrial Properties (IIPR)
Some investors might look at approaching the industry indirectly. One company that has succeeded with this strategy is Innovative Industrial Properties, Inc. (IIPR). IIPR is a Maryland real estate investment trust that invests in properties suited for growing marijuana.
Why Investors Like It: Unlike most marijuana companies, it earns a profit. And as a REIT, it must pay out at least 90% of net income in the form of dividends, so investors can earn cash flow while benefiting from the otherwise volatile cannabis industry.
Investors need to note some facts when buying exchange-traded funds that cover the marijuana industry. First, the marijuana industry is relatively new, so investors have few choices when it comes to marijuana ETFs. In addition, the average expense ratio for an ETF comes in at 0.70%, meaning investors pay $7 in fees for every $1,000 they invest. Only two marijuana ETFs charge fees below that level.
Still, diversification can give you some protection in an industry prone to extreme moves. That by itself makes marijuana ETFs worth exploring, and two cannabis ETFs in particular warrant a closer look.
|At a Glance: Notable Marijuana ETFs|
|ETF||Ticker||Why Investors Like It|
|ETFMG Alternative Harvest ETF||MJ||
|Cambria Cannabis ETF||TOKE||
ETFMG Alternative Harvest ETF
The ETFMG Alternative Harvest ETF (MJ) is by far the largest and oldest in the group. Whereas MJ has accumulated more than $942 million in assets under management, only two other marijuana ETFs have yet to breach $50 million.
The largest holding of the fund is Aphria, Inc., comprising about 9.09%. The next major holdings consist of top Canadian marijuana stocks.
Why Investors Like It: Although ETFMG Alternative Harvest’s 0.75% expense ratio makes it a relatively expensive fund, many investors will balk at the three consecutive years of double digits losses from 2018 to 2020, amounting to 21%, 28% and 11%, respectively. However, when considering that Tilray (TLRY), a holding of MJ, dropped by more than 50% from its IPO price — and more than 95% from its all-time high — this diversification still offers some protection.
Cambria Cannabis ETF
Cambria Cannabis ETF (TOKE) is a new marijuana ETF that began trading in July 2019. Thanks to its inception date, it missed much of the drop in marijuana stocks that began when many equities peaked in the spring. As a result, its decline of about 34% since inception is less than the declines of many other ETFs for the year.
Among Cambria’s top holdings is Constellation Brands (STZ), an early cannabis investor.
Why Investors Like It: With an expense ratio of 0.42%, Cambria Cannabis has a lower management cost than other marijuana ETFs. Furthermore, the fund doesn’t restrict itself to marijuana equities. Its largest holding, GW Pharmaceuticals, focuses on pharma.
Investors should look at marijuana investments due to the rapid growth opportunities they offer. In North America alone, the legal cannabis market was worth $12.9 billion in 2019, and the industry has brought economic growth to the states that have legalized it. Analysts expect revenue to reach $35 billion in the U.S. by 2025.
Benefiting the industry is the fact that consumers increasingly see cannabis as a medical product rather than one that is merely recreational. For example, marijuana-based products could provide a safer alternative for chronic pain than opioids, and drugs such as Epidiolex have shown that cannabis-based products can treat epilepsy.
Furthermore, despite several decades of interdiction efforts, the government failed to quell the appetite for recreational marijuana. Seeing this failure, many jurisdictions decided instead to legalize and tax cannabis. Colorado, the first U.S. state to fully legalize cannabis (along with Washington), passed the $1.72 billion mark in revenue generated by marijuana sales, resulting in over $302 million in marijuana tax revenue. Recreational weed has driven an estimated two-thirds of the growth that could deliver massive investor returns over the next decade.
Marijuana stocks, especially those in Canada, trade on the major U.S. exchanges, so investors can purchase them through a brokerage account just as they would other stocks. For investors with a greater appetite for risk, several more companies, particularly U.S.-based cannabis companies, trade on the over-the-counter market.
Marijuana products go well beyond dried cannabis. Some companies, for example, specialize in CBD oils. These have become popular for medicinal purposes. This is especially true for the hemp-based CBD oils. The lack of Schedule I restrictions has also attracted interest from mainstream retailers such as CVS Health (CVS). Other cannabis-based products such as Epidiolex have earned approval from the FDA. Hemp serves as the basis for products in numerous additional categories, including food and beauty.
Canada experienced the next bump-up in cannabis popularity on Oct. 17, 2019. Dubbed “legalization 2.0” by some, this was the day that cannabis-infused products such as beverages, edibles and vapes become legal. As legalization spreads, more markets open up for cannabis-related products.
A few major types of marijuana companies exist:
Growers: As the name implies, these companies grow the actual cannabis, whether in a greenhouse or outdoors. Some of the more prominent names in this industry, such as Canopy Growth and Aurora Cannabis (ACB), derive much of their income from the production side of the business.
Biotechs: Biotechs use cannabis to develop products that can treat specific medical conditions. As mentioned earlier, GW Pharmaceuticals has built its business on its FDA-approved cannabis-based drug. Many of the companies that produce CBD, especially companies that work only with hemp, could also fit into this category.
Ancillary Products and Services: The cannabis industry depends on support services. Because these support companies do not handle cannabis directly, they rarely face Schedule I restrictions. As mentioned previously, Innovative Industrial Properties provides the land and greenhouses used for growing cannabis products. And Scott’s Miracle-Gro (SMG), a company known for lawn fertilizer, offers nutritional and lighting products used to grow marijuana.
Investing in marijuana stocks has many similarities to investing in companies in any other industry. Consequently, investors should research both the management team and the company’s strategy. Investors also need to study how a company stacks up against its competition. In other words, they need to evaluate sales and growth numbers versus other providers’. Finally, investors should look at financials. This often means looking at the price-to-earnings, or P/E, ratio — or, in the case of the many marijuana companies that don’t yet have positive earnings, growth rates and estimates on how soon Wall Street believes the company will turn profitable.
Investors who decide to invest in cannabis stocks should only put a small portion of their investment dollars into these equities. One reason for caution is that the stocks have become popular, and in many cases, expensive. On the other side of that, as shown by the performance of ETFs this year, the euphoria of previous years has given way to pessimism. As a result, many of the best cannabis stocks have fallen over the course of the year.
The ETFMG Alternative Harvest ETF, which invests in most of the top marijuana equities, shows this well. Since peaking at $39.50 in September 2018, the stock fell to below $10 per share by March 2020. Despite its status as a top stock, Canopy Growth lost more than 80% of its value in the same period, falling from over $51 per share to below $10.
Investors also need to remember that the majority of weed stocks lose money. Many may never turn a profit and could end up closing their doors. Others should turn profitable and become more stable investments over time. Until that time, this sector will remain risky. Those who are risk intolerant should wait until these stocks begin to resemble more stable alcohol, tobacco or pharma stocks before considering an investment.
As a new industry, the marijuana sector continues to endure rapid change. Thus, those investing in cannabis should follow marijuana stocks closely, as conditions can change rapidly.
One other consideration is the legal environment. The U.S. has seen a gradual move toward legalization, first on the medical side, and on the recreational side more recently. The pace of legalization, particularly with more psychoactive forms of marijuana, will likely have a dramatic effect on the performance of cannabis stocks.
Even in places where marijuana enjoys legal status, investors need to remain aware of regulations. For example, Oregon has produced more cannabis than it can consume, but Schedule I restrictions prevent it from exporting the surplus to other states. This complicated legal environment makes it critical that investors understand how laws and regulations will affect these stocks for some time to come.
The cannabis industry promises to bring a wide array of products to the market. This should fuel long-term stock growth as the industry matures and companies begin to earn profits.
That said, weed stocks have seen stratospheric valuations in recent years. This led to a stock selloff in 2019, and it might leave investors wondering if they can benefit from marijuana stocks going forward.
Although investors will have to consider these points if they decide to buy cannabis stocks, they can still fall back on the skills that have served them when investing in stocks representing other industries. Even if you don’t decide to buy marijuana stocks now, the massive growth expected in future years should create opportunities in this budding sector.
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John Csiszar contributed to the reporting for this article.