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Cannabis is an enticing industry for many investors.
For one thing, the legal marijuana business seems poised to grow significantly as more places legalize cannabis. So far, medical marijuana is legal in more than 30 countries, with four nations, including Canada, legalizing recreational use.
In the United States, medical cannabis is legal in 33 states and the District of Columbia. Eleven of those states, including the District, legalized recreational marijuana use.
With most polls showing that a majority of Americans support legalization, there is hope that marijuana will be legalized at the federal level as well. The U.S. House Judiciary Committee voted in late 2019 to remove cannabis from the Controlled Substances Act, which currently classifies the plant as a Schedule I narcotic, alongside heroin and cocaine.
Investors may be able to cash in as more countries, including the United States, open up to cannabis. And if you're interested in learning how to invest in marijuana, then you've come to the right place.
We'll cover how to invest in cannabis stock below. But first, let's better understand the marijuana industry.
What Makes Up the Marijuana Industry?
Two plants are at the core of the marijuana industry.
There's cannabis sativa, which provides marijuana for medical and recreational use. And there's cannabis sativa L, better known as hemp. Manufacturers use hemp to make goods such as fabric and paper.
The U.S. government legalized hemp production in December 2018. And, as we mentioned, a growing number of countries and U.S. states are legalizing various uses of marijuana, and hemp in particular.
Most cannabis companies fall into at least one of three categories:
- Growers - companies producing cannabis or hemp.
- Medical and biotech - companies making medical marijuana drugs and products.
- Ancillary - companies investing in or supplying goods or services to cannabis businesses.
Most marijuana products come from one of two components of cannabis plants:
- THC - a chemical compound that produces psychoactive effects.
- CBD - a non-psychoactive compound.
Both products offer medicinal benefits, but to due to the psychoactive effects of THC, this compound has been more tightly regulated.
Examples of products using THC are consumable goods, such as cookies and gummies. And some companies are experimenting with marijuana-infused beverages.
Then there are CBD-oil products - this area is wide-ranging. There are CBD-oil creams, lip gloss, drops, and at least one U.S. Food and Drug Administration (FDA)-approved drug, Epidiolex.
All of these goods make up a growing industry. But how big can cannabis be?
One Wall Street analyst said in late 2019 that the legal U.S. marijuana industry could reach $80 billion by 2030. And Hemp Business Journal predicts that the U.S. CBD market will hit $2.1 billion in sales in 2020.
It's hard to predict how big the cannabis market could get, but it definitely is an intriguing opportunity.
Now that you know the background, we'll show you how to invest in marijuana.
How to Invest in Cannabis Stocks Wisely
When it comes to cannabis, investors smell opportunity. Let's talk about how to invest in the marijuana industry.
First, the two largest legal marijuana markets are currently Canada and the United States, and it's in these countries that most cannabis companies with publicly traded stock are based.
Investors can buy some companies' stocks on Canadian exchanges, such as the Toronto Stock Exchange, and U.S. exchanges, such as the New York Stock Exchange and the Nasdaq.
Some businesses operate in both Canada and the United States, within U.S. states where it's been legalized.
As with any stock, there is some risk with investing in cannabis, but the potential rewards may outweigh the risks.
Investing in cannabis takes on a similar approach to buying any other stock.
We see four strategic areas to focus on when picking cannabis stocks:
- Company leadership
- Business plan
When looking at a marijuana company's leadership team, see if they have previous experience in their field or the industry.
Do they have cannabis or agricultural experience? Are they experts in the business's focus area?
Let's say the company's producing medical marijuana products. Does anyone on the leadership team have a background making and selling medicine?
Think about if the leadership can respond to legal and regulatory changes. Is there a lawyer or a medical expert on board?
Also, find out how many of the company's shares the leadership team holds. Have they been selling or buying more? This activity can signal if a business's leaders feel positive or negative about the company's prospects.
Are there stock options on the table for executives and employees. If so, what are the options' exercise prices? This info can help keep your investment from dilution.
It's also important to look at turnover. If a company's management is constantly changing, then it could be a sign of weak leadership. But if the management team is growing alongside the company, then you can be more confident in their direction.
Along with a company's leadership team, look and see if the company's profitable.
If so, that can indicate a well-run and strategically successful business.
But profitability in such a new and growing industry can be hard to come by. We expect to see cannabis firms spending money to grow their businesses, so profitability won't be their first goal.
Instead, look for growing top-line revenue and improving earnings before interest, taxes, and amortization (EBITA). This will show the company is heading in the right direction. Spending tons of money to grow without gaining more revenue is a red flag.
You also want to understand a company's business plan. Where is it focusing? How does it plan to grow?
Since marijuana's still federally illegal in the United States, a business targeting the U.S. might be riskier than one focused on Canada. At the same time, such a company might be well-positioned if the U.S. legalizes cannabis.
You also want to make sure the company has a clear branding strategy. A company that knows what it wants to sell and how to sell it has something to build on. But a company flapping in the breeze chasing every new fad isn't putting down roots to grow.
Lastly, investigate a company's competition. The more competitors, the more money it can cost for a business to achieve profitability. But competition can also indicate a vibrant market with growth potential.
Above are ways to invest in cannabis companies directly. Now let's cover how to invest in marijuana in other ways.
Most industries have exchange-traded funds (ETFs) for investors to consider. Cannabis is no different.
ETFs are investment vehicles comprised of stocks, bonds, or commodities. An ETF's asset performance determines how well the ETF performs.
ETFs typically try to match a broad index by owning every company in an index or a representative batch of companies in an index. These aren't actively managed funds where a manager picks and chooses which companies they think are the best; they simply try to represent the entire sector.
For example, the U.S. Marijuana Index tracks the share price of 30 leading cannabis companies. Between 2015 and 2020, the index has ranged from a low of $22.37 to a high of $134.41.
Investors buy shares in an ETF. If the fund goes up, they make money. If the fund goes down, they do not.
Some investors buy into ETFs because they're less risky. Instead of putting your money into a single company, you can spread your risk across many companies. On the flip side, if a company does well, your returns are less than if you'd put your investment toward that single business.
There are many marijuana ETFs for investors to consider. A few examples include:
- AdvisorShares Pure Cannabis ETF
- Cannabis ETF
- Cambria Cannabis ETF
- Indxx MicroSectors Cannabis 2X Leveraged ETN
Buying shares in a cannabis ETF is one way to invest in marijuana while reducing your risk. Still, there are some specifics about marijuana ETFs you should consider before investing.
The majority of many marijuana ETFs feature companies with growth strategies focused outside the U.S. due to the United States' legal and regulatory structure.
But the U.S. marijuana market is likely to show huge potential. Buying into an ETF with few or no companies operating in the United States could mean you won't earn a significant return if and when the legal U.S. cannabis market opens up, but you could also be getting into a great industry at the ground floor.
Be aware that marijuana ETFs have expense ratios, which is what an ETF operator charges investors.
Since cannabis stocks may come with higher risks, some ETF managers may reflect that in the cost of operating a marijuana ETF.
Despite some of the risks of cannabis investing, there are other ways to invest in marijuana.
Investing in Supporting Players
Cannabis is an industry relying on others for its growth. That means you can invest in companies outside marijuana and still benefit from the industry's expansion.
For example, Scots Miracle-Gro Co. makes products, such as fertilizers, that many agricultural growers use. That includes companies that produce marijuana.
Scotts Miracle-Gro isn't directly involved in cannabis. And most of its customers are outside the industry. But marijuana makes up a growing portion of its market, potentially putting the company in a position to reap returns if cannabis takes off.
You can also invest in organizations partnering with cannabis businesses.
Anheuser-Busch InBev is partnering with Canadian cannabis pharmaceutical company Tilray to investigate marijuana-infused beverages. And Constellation Brands, maker of beers such as Corona and Modelo, has a 38% ownership stake in the marijuana business Canopy Growth.
Or, some companies are coming out with cannabis-infused products. Molson Coors, for example, plans to launch six marijuana-based beverages.
Its first is cannabis-infused spring water called Flow Glow. Molson Coors plans to launch the drink in December 2020.
These are just some of the ways you can invest in cannabis without doing so directly. If the industry continues developing, look for more opportunities to invest in companies supporting or partnering with marijuana businesses.
Potential for Explosive Growth
The cannabis industry is expanding, causing many investors to wonder how to invest in marijuana.
And it's easy to see why. The potential is there for explosive growth and impressive financial returns.
As with all stocks, investing in the marijuana industry has risks. But as we covered, you can still invest in cannabis with minimal risk.
If you'd like to learn more about investing in marijuana, start at the beginning of our comprehensive guide for information on how to choose marijuana stocks, as well as choosing CBD stocks. This guide will help you discover the many different types of cannabis businesses and how to make the best decisions when investing in this industry.