Marijuana Investing: How To Navigate the Opportunities and Pitfalls in This Budding Industry

Understand the volatile but lucrative cannabis industry.

The steady trend in marijuana legalization has created new opportunities in the investment world. Although recreational marijuana use remains illegal across most of the U.S., investment opportunities have abounded both internationally and domestically.

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. 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., 33 states have legalized marijuana for medical purposes. Eleven 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.

Save for Your Future
Sponsors of

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.

As more jurisdictions legalize, investors need to understand both the vast array of products available and the challenges investors face in making profitable investments.

Understanding the Risks of Investing in Cannabis Stocks and ETFs

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.

Save for Your Future
Sponsors of

Moreover, due to high demand, many of the best weed stocks trade at a massive premium. Many recall that Tilray shot as high as $300 per share. Today, more than a year after legalization, it has fallen to around $22 per share as of mid-January 2020. Hence, high levels of volatility remain a danger.

Top Cannabis Stocks To Consider

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
  • Investment from constellation brands
  • Large size
  • Diversity

Charlotte’s Web Holdings

CWBHF
  • Free of Schedule I restrictions
  • Large retail footprint
  • Earns a profit
Innovative Industrial Properties IIPR
  • Free of Schedule I restrictions
  • Earns a profit
  • Pays dividends

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.

Save for Your Future
Sponsors of

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.

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 8,000 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 San Diego-based real estate investment trust that invests in properties suited for growing marijuana.

Save for Your Future
Sponsors of

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.

[Back to top]

Top Cannabis ETFs to Consider

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 0.44%, meaning investors pay $4.40 in fees for every $1,000 they invest. Only one marijuana ETF charges 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
  • Oldest marijuana ETF
  • Still a pure marijuana play
Cambria Cannabis ETF TOKE
  • Lower expense ratio
  • Heavy focus on pharma

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 $710 million in assets under management, the other marijuana ETFs have yet to breach $100 million.

Save for Your Future
Sponsors of

The largest holding of the fund is GW Pharmaceuticals (GWPH), comprising about 9.4%. GW stands out for its sale of Epidiolex, an FDA-approved treatment for epilepsy. The next five holdings consist of five 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 39% losses it sustained over the last 12 months. However, when considering that Tilray (TLRY), a holding of MJ, dropped by almost 85% in the same period, 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 29% 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. Two of its largest holdings — MediPharm Labs and GW Pharmaceuticals — focus on pharma. The fund also holds British American Tobacco (BTI), a company not involved in cannabis as of this writing.

Save for Your Future
Sponsors of

[Back to top]

Why Should You Consider Investing in Cannabis?

Investors should look at marijuana investments due to the rapid growth opportunities they offer. In North America alone, consumers spent $9.2 billion on cannabis products, and the industry has brought economic growth to the states that have legalized it. Analysts expect revenue to reach $47.3 billion in the U.S. and $57 billion worldwide by 2027.

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, recently passed the $1 billion mark on tax revenue generated by marijuana sales. Recreational weed has driven an estimated two-thirds of the growth that could deliver massive investor returns over the next decade.

[Back to top]

How To Invest in Marijuana Stocks

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.

Understanding the Products

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 will soon experience what some dub “legalization 2.0” as cannabis-infused products such as beverages, edibles and vapes become legal. On Oct. 17, 2019 — exactly one year after marijuana became legal in Canada —  the Canadian government began accepting applications to approve such products. Although the firms will have to wait at least 60 days to receive approval, this should fuel further growth within the industry as firms offer a wider array of products.

Types of Marijuana Companies

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.

What To Look For in a Marijuana Stock

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.

[Back to top]

See: These Major Brands Are Taking Cannabis Mainstream — Will You Invest?

Be Smart With Your Cannabis Investments

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 on March 19 at $39.25 per share, it fell to just above $18 per share by mid-November. Despite its status as a top stock, Canopy Growth lost more than 60% of its value in the same period, falling from a record of $52.74 per share to also just above $18 per share. This wiped out more than $11 billion of its value.

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.

[Back to top]

Keeping Up With Cannabis Stocks

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.

[Back to top]

Are Marijuana Stocks For You?

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.

More From GOBankingRates

Related Video

About the Author

Will Healy

Will Healy is a freelance business and financial writer based in the Dallas area. He has covered a variety of topics, such as stocks, real estate, insurance, personal finance and macroeconomics. In addition to GOBankingRates, his articles have appeared on sites such as InvestorPlace, Yahoo! Finance, MSN Money, Kiplinger’s Personal Finance and Seeking Alpha.

Read More