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Cannabis businesses are heating up, and it's easy to see why cannabis investing is, too.
In the United States alone, it is estimated that the global marijuana market will be worth $32 billion by 2022. And one Wall Street analyst expects cannabis to be an $80 billion industry by 2030.
There are many different types of cannabis businesses in which to invest. These types of businesses include marijuana dispensaries, marijuana growers, cannabis distributors, and more.
Most businesses in the cannabis industry fall into at least one of three categories:
- Marijuana growers
- Biotech or medical
- Ancillary products and services
And there are two basic types of cannabis products:
- Marijuana for medical use
- Marijuana for recreational use
Medical marijuana includes not just THC, but another chemical compound from the cannabis plant called cannabidiol, or CBD. CBD can be used to treat a variety of ailments, from nausea to seizures. And many cannabis businesses put CBD in a broad range of products including oils and cosmetics.
Recreational marijuana leverages cannabis' psychoactive effects, courtesy of its compound delta-9 tetrahydrocannabinol, better known as THC. THC products frequently include dried cannabis leaves. Some of these products may be for smoking, and other edible products, such as brownies or candy, have the dried leaves baked inside.
More than 30 U.S. states allow medical marijuana use. Eleven of these states and the District of Columbia legalized recreational cannabis use as well.
Many states allow the selling of cannabis through marijuana dispensaries. Dispensaries are retail locations selling marijuana and marijuana-based products.
Outside the United States, recreational marijuana use is legal in four countries, including Canada. Dozens of nations now allow for medical cannabis use.
The increased legalization of marijuana is opening doors for cannabis businesses. And that's creating opportunities for investors.
But what types of cannabis businesses can you invest in? Let's first look at marijuana growers.
Marijuana growers comprise a significant number of cannabis businesses. After all, there isn't a marijuana industry without someone growing cannabis.
Many cannabis growers frequently make and sell marijuana-based products or run dispensaries. As growers, they have greater control over the supply they use in their production.
These growers are also frequently marijuana distributors.
Some of the largest marijuana growers include:
- Acreage Holdings
- Curaleaf Holdings
- Harvest Health and Recreation
- Trulieve Cannabis
Trulieve may be the largest medical marijuana company in Florida, the third-largest U.S. state by population. The company operates stores in Florida, California, Massachusetts, and Connecticut and earned $96.1 million in revenue in the first quarter of 2020.
Acreage Holdings runs dispensaries in addition to focusing primarily on producing brand-name products. Acreage develops and sells items for use in vaping, CBD-oil based goods, and more.
Acreage also has star power on its board of directors. Both former U.S. House Speaker John Boehner and former Canadian Prime Minister Brian Mulroney serve on the company's board. Given the industry's ever-changing legal framework, Boehner and Mulroney's involvement may help Acreage navigate the regulatory waters.
Harvest Health and Recreation owns and operates 35 marijuana dispensaries across seven states. It reported Q1 2020 revenue of $45 million, a 134% increase over the same period in 2019.
Curaleaf runs 57 cannabis dispensaries in 17 states. The company also operates 15 sites for cultivation, or locations for growing cannabis as well as 24 processing plants.
And Aphria's Q3 2020 net revenue increased 96% from the prior year. The company's adult cannabis business brought in $44.7 million in gross revenue in that quarter alone.
These are some of the leading marijuana growers. Now let's talk about those cannabis businesses in the medical space.
Medical Marijuana Companies
The medical side of marijuana includes companies that specialize in using both THC and CBD found in cannabis.
CBD is non-psychoactive. Doctors and others use CBD-based products to treat a variety of ailments including anxiety, nausea, and depression. It's often prescribed to and taken by people who have cancer, HIV/AIDS, and multiple sclerosis.
THC can be used to improve appetite, as a non-addictive pain treatment, to treat mood disorders, and to treat other illnesses like Glaucoma.
While THC is still prohibited at the federal level, CBD's use was legalized in 2018. That's opened the doors for it to be used in pharmaceuticals.
In 2018, the U.S. Food and Drug Administration approved its first-ever CBD-based medicine. This medicine, Epidiolex, is made by GW Pharmaceuticals and was developed to treat people suffering from rare forms of epilepsy.
GW Pharmaceuticals is one of the world's leading cannabis biotech companies. Others include Tilray and Cara Therapeutics.
Cara Therapeutics is currently in the clinical trial stage of developing a product called KORSUVA™. Cara Therapeutics expects the medicine to alleviate the suffering of pruritus, or chronically itchy skin.
Tilray researches and cultivates medical marijuana while supplying cannabis flowers and related products to affiliates in five countries, including Canada and Germany. Tilray does not currently work in the United States.
Tilray is also notable for its partnership with Anheuser-Busch InBev. The beer maker enlisted Tilray's help to develop and create marijuana-infused beverages.
Many industry experts see massive potential in cannabis biotech companies, and more and more people are buying CBD-based products. While legal and regulatory changes may impact the industry, this burgeoning market is expanding exponentially.
This expansive growth also means more opportunities for investing in CBD stocks.
Ultimately, the medical marijuana category holds intriguing possibilities for investors looking to get into the cannabis industry.
Ancillary Cannabis Businesses
We've covered marijuana growers and cannabis biotech companies, but there's another category of businesses benefitting from the expanding marijuana industry.
Companies providing goods and services to cannabis businesses should also be on your investment radar. We call these ancillary businesses since they provide support to the marijuana industry.
Cannabis may not comprise the bulk of these companies' revenue. But marijuana contributes to their bottom line and offers the opportunity for future growth.
These companies also allow investors to gain exposure to cannabis' incredible potential upside without the volatility of a new sector.
Within this category, the alcohol sector leads the way. As mentioned above, Anheuser-Busch InBev partnered with medical marijuana company Tilray to research cannabis-based drinks.
And Molson Coors also plans to launch six marijuana-based beverages in Canada. The first, Flow Glow, is cannabis-infused spring water. The company intends to roll it out in December 2020.
Constellation Brands owns the popular beers Corona and Modelo. It's invested billions in marijuana grower Canopy Growth, raising expectations that this beverage brand will join the race to unveil cannabis-infused drinks.
Outside the beverage category are companies supplying products used in the growing of marijuana. Scotts, the company that produces the well-known Miracle-Gro™ product, is a perfect example of this type of ancillary support.
Most of Scotts' customers are outside the cannabis industry. They're people who use the company's product on their lawns and gardens.
But Scotts' products are also used by cannabis growers. Scotts appears well-positioned to be intensely involved with the marijuana industry as it grows.
As cannabis businesses takes off, other companies in a variety of industries will grow alongside them. Monitor headlines and industry reports to see which ancillary businesses partner with marijuana businesses.
Thinking about a company's revenue sources and lines of business can help you identify potentially strong cannabis investments for your portfolio.
But identifying ancillary cannabis businesses is just one way to spot potentially strong investments for your portfolio. Let's walk through some others.
What to Look for in a Cannabis Company
There are many things to consider when looking to invest in a cannabis company.
Like investing in any stock, it's crucial to know the risks. It's important to understand both the potential for growth and profit as well as the unique risks when buying shares in marijuana businesses.
The Risks of Investing in Cannabis
We see three critical risks with marijuana stocks:
- Legal restrictions
In the United States, marijuana is not yet legal at the federal level. While states and cities continually update their laws and regulations, the cannabis industry will be subject to legislative and regulatory risks for the foreseeable future. This means that it's important to evaluate the legal considerations as you invest in cannabis businesses.
Valuation can also be tricky in a new industry. Many cannabis companies are just getting started, so you're investing in their future potential. Making an assessment about the future growth of a company with a limited track record carries some risk. But that's also why these investments have such high upside potential.
Commoditization is another risk. Just like wheat or soybeans, marijuana is a commodity. While the cannabis industry is expected to grow, if supply outpaces demand, prices could fall, and marijuana growers could suffer losses. That's why it makes sense to focus on medical marijuana companies and ancillary businesses over growers. Just like any other commoditized industry, there will be growers who do well, but they'll be exposed to price risks.
Even with these risks, cannabis offers strong return potential to stock investors. Here is some advice on picking the right marijuana businesses for your portfolio.
Reviewing Cannabis Companies
Choosing cannabis businesses to buy stock in isn't dissimilar to how you pick any company in which to invest. But there are a few unique considerations to watch out for.
Start with looking at a company's leadership team. Does the leadership team include people with experience in the appropriate industry? Do any leaders have a background in cannabis, agriculture, or, if relevant, pharmaceuticals?
You also want to think about which executive team you feel is best equipped to respond to legal and regulatory changes. Does someone on the team have a law background? If this person is on social media, review this leader's social media profiles to help you understand their thought process and how they handle roadblocks.
It's also good to see a management team that stays in place. A lot of turnover in the management level could be a bad sign.
After looking at a company's executives, investigate a company's business plan. How does it plan to grow? Is the business open to working internationally, or is it committed to one country?
Look at the amount of revenue the business brings in alongside the debt it has on its books. If the company you're thinking about investing in is profitable, that's good. Since companies in this industry are often new, it's unlikely you'll find many turning a profit right away. Look for growing revenue and manageable debt instead.
And be sure to understand the company's competition. A competitive space may indicate a fertile market. If the competition is too intense, the competition can make it costlier for a business to turn a profit. However, intense competition may bring in more consumers. Understanding the environment in which a company operates can give you powerful insights into where to invest.
Slow and Steady Can Win the Race
Because cannabis is a new and growing industry, it can feel like a race to invest. But slow and steady investing is a better approach than rushing into investments.
Understand the risks and review each investment opportunity carefully. Consider starting small and adjusting over time. You can increase your investment after you know the industry and its players better.
Be aware of how much of your portfolio is comprised of cannabis businesses. Diversifying your investments is always a smart strategy. And maintaining a diverse portfolio is especially important when investing in an industry that's volatile, such as marijuana.
Or think about other ways to invest in cannabis businesses.
Consider buying stock in an ancillary company, such as Scotts or Constellation Brands that have a broad range of products and customers. You could also purchase shares in a marijuana exchange-traded funds (ETFs).
ETFs track indexes by owning most of the companies in a sector. ETFs help you match the overall returns of an industry without the risk of buying the wrong stock. But ETFs also limit your upside.
There are many marijuana ETFs currently on the market.
Another critical factor in succeeding in investing in cannabis stocks is to pay attention to the news. Laws, regulations, and competitors are always changing. You never know when something will impact your investment.
If you follow the above guidelines, you could be on your way to achieving investing success in the marijuana industry.