• February 7, 2022
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A Guide to Cannabis Investing

A Guide to Cannabis Investing

They don’t call it the “green rush” for nothing. As legalization intensifies around the world, stock prices are skyrocketing. And new business opportunities are popping up by the minute.

By 2025, the global market value of legal marijuana is expected to reach an outstanding $146.4 billion. The medical marijuana market, coupled with the increasing use of CBD-related products, is making the market ripe for reaping.

But perhaps the biggest reapers of the green rush are the people investing in it. When we say invest, we don’t just mean the cultivators, distributors, and manufacturers. We’re also talking about the people buying cannabis stocks and investing in other cannabis-related industries.

That’s why in this article, we’re going to cover everything you need to know about investing in the cannabis industry.

Why Invest in Cannabis?

All worthwhile investments have one thing in common — profit potential. And the cannabis industry isn’t any different. In fact, it’s one of the most profitable ventures right now. Here are a few reasons why you should consider investing in cannabis.

Tons of New Products and Uses

The old notions about the negative effects of cannabis and the stigma that came with them are slowly being eroded. People are more open to cannabis and its products now than ever. And cannabis product manufacturers are taking advantage of this opportunity to produce a wide range of products.

There are applications of cannabis in the medical community, and now, there are more than 3.6 million medical marijuana patients in the U.S. alone.

CBD products’ popularity is also on the rise, with consumers purchasing items such as CBD oil, gummies, and even beverages.

Huge Potential for Growth

Let’s face it; the cannabis industry is still pretty young. In fact, most states have just recently legalized it. And sales haven’t even started. This means that there is still plenty of room for future growth that could come from further legalization, especially at the federal level. Legalization at the federal level will bring a wider adaptation of cannabis products and uses.

There Are Tons of Investment Opportunities

As companies work to innovate new products in the fast-changing industry, tons of investment opportunities will be created for those willing to take the risk. However, you’ll still need to do a little research to mitigate the associated risks.

How to Invest in the Cannabis Industry

How to Invest in the Cannabis Industry

You can invest in the cannabis industry by buying the stocks of the companies within it. These companies generally fall under three categories:

  • Ancillary product and service providers.
  • Cannabis growers and retailers.
  • Cannabis-focused biotech companies.

When it comes to investing in cannabis stocks, the process is pretty much the same as with any other industry. However, there’s one exception — since cannabis is still illegal at the federal level, companies that deal directly in the product are not listed under any stock exchange in the U.S. They are, however, allowed to trade in the Canadian stock market.

That being said, other companies that deal in cannabis indirectly, such as supplying growing equipment, research, and other products, are listed on the U.S. stock exchanges, like the Nasdaq. You can also trade these stocks through any brokerage firm.

But, before you start investing, it is advisable that you do some research on various cannabis stocks. First, you need to look at each company’s performance ever since it went public. Then compare its performance to that of its competitors. You can also review a company’s performance by reviewing the financial statements it has signed with the securities and exchange commission.

Most financial experts recommend limiting cannabis stocks to a small percentage of your overall portfolio. For example, you could have 5 percent of your overall portfolio on alternative investments, such as cryptocurrency and cannabis, while keeping the rest in diversified index funds.

Investing in Cannabis Stocks

We already know it’s a worthwhile investment. But what’s the best approach to cannabis stock investing? Here are a few key steps to get you started.

Understand the Different Types of Cannabis Products

Cannabis products generally fall under two broad categories:

  • Medical Cannabis: Medical cannabis is marijuana used for medical purposes. It is legal in 35 U.S. states, including the district of Columbia. It’s also legal in 30 other countries. A patient needs a medical prescription from a licensed medical practitioner to purchase medical marijuana. It is mostly prescribed to adults dealing with frequent anxiety, depression, stress, and pain.
  • Recreational Cannabis: Recreational marijuana is legal in 19 U.S. states, including the District of Columbia. It is also legal in Canada, Mexico, Georgia, South Africa, and Uruguay.

Know the Different Types of Cannabis Companies

Companies in the cannabis industry fall under three categories:

  • Cannabis Growers and Retailers: These types of companies cultivate marijuana, often in greenhouses or indoors. They also harvest the crops and distribute the end product to customers. Some of these companies also operate retail stores that sell both medical and recreational marijuana.
  • Cannabis-Focused Biotech Companies: Most cannabis-focused biotech companies make their money by extracting cannabinoids from cannabis plants. They also develop new pharmaceutical drugs.
  • Ancillary Products and Service Providers: These companies don’t touch cannabis plants. Instead, they support the cannabis industry by supplying various products and services. These include hydroponic systems, packaging materials, lighting systems, and management services.

Understand the Risks Involved in Investing in the Industry

Understand the Risks Involved in Investing in the Industry

Investing in any industry comes with a certain degree of risk. And the cannabis industry isn’t any different. Here are a few potential risks that you should understand before investing in the cannabis industry:

  • Supply and Demand Imbalance: As a fairly new industry in the agricultural sector, the cannabis industry is particularly prone to experiencing irregularities in supply and demand. Take Canada, for example. Cannabis growers in Canada initially undertook significant growth and expansion initiatives to increase production capacity in order to meet the increased demand for recreational cannabis. But now, most of these companies are cutting back on production. This is because cannabis production in Canada is surpassing demand. This causes cannabis prices to drop.
  • Legal and Political Risks: As we said earlier, cannabis is still illegal at the federal level in the U.S. Additionally, U.S. federal laws on marijuana have severe restrictions on financial institutions that deal with cannabis-related businesses. It is, therefore, difficult for a cannabis-related business in the U.S. to access critical financial services. And although political support for the federal legalization of marijuana has increased significantly, there’s no guarantee as to when or whether federal legalization will occur.
  • Financial Constraints: Despite the seemingly profitable nature of the industry, some companies in the cannabis industry aren’t recording any profits. Similarly, there are numerous cannabis growers out there facing the prospect of running out of cash. These companies often raise capital by issuing new shares. Which, in turn, dilutes the value of their existing shares. And the saddest part is, even after this dilution, some of these companies still struggle to obtain enough capital to operate successfully.
  • Over-the-Counter (OTC) Stock Risks: Many companies in the cannabis industry trade OTC. Meaning that they are not required to file regular financial statements, which are vital for any investor looking to assess the risk of a stock. Additionally, these companies don’t have to maintain minimum market capitalizations. This results in low liquidity levels, thus making their stocks difficult to trade.

Know Exactly What to Look for in a Top Cannabis Stock

Before you buy any cannabis stock, you should:

  • Look into the management system.
  • Scrutinize the company’s financial statements.
  • Understand the company’s competitive position and growth strategy.
  • Examine how many convertible securities and warrants the company has issued. A high percentage typically indicates that the company stock will be significantly diluted in the future. This potentially causes the stock price to drop substantially.

When dealing with stocks from a marijuana company, you should research the following metrics:

  • Cash cost per gram: This is the company’s cost of producing cannabis per gram. These costs include packaging, amortization, and inventory adjustments.
  • All-in cost of sales per gram: This is a company’s total cost of producing cannabis per gram.

Invest in Your Favorite Companies

Despite the potential for huge profits, investing in cannabis companies isn’t right for everyone. This is especially true for conservative investors. As such, you should only invest in cannabis companies if you understand and can tolerate the high levels of risk involved.

Even if you are an aggressive investor, putting too much of one cannabis stock or ETF on your portfolio isn’t wise. Instead, consider starting with a small portion then growing it progressively as the cannabis market grows and the company’s revenue increases. As your investment thesis is confirmed, the investment becomes less risky. But if the company starts performing poorly, you should reevaluate your investment assumptions.

Like with any other stock, some cannabis stocks are generally safer than others. For example, ancillary product and services providers who don’t rely solely on the cannabis industry for their revenue are generally safer than companies that take 100 percent of their revenue from the cannabis industry.

Top Cannabis Stocks to Watch Out For

Top Cannabis Stocks to Watch Out For

Green Thumb Industries (OTC: GTBIF)

Green Thumb Industries operates numerous retail cannabis stores across 12 states in the U.S. It also operates 13 manufacturing facilities. Additionally, the company holds a total of 96 licenses for retail cannabis locations.

Although the company has opened little over half as many locations, the legal recreational cannabis market in Illinois is open for business. And it’s benefiting tremendously from the increased sales volume. The company also plans to expand into other states like New York and New Jersey.

Amyris Inc. (AMRS)

Amyris Inc. (AMRS) is one of the most promising cannabis stocks this year. The stock has gained nearly 450 percent since January 2021. And the trend is expected to continue well into the next year.

The company has been working to create synthetic cannabinoids that have the potential to revolutionize the entire industry. It has a $4.5 billion market cap, and its recurrent quarterly sales figures are up by 74 percent. Although Amyris hasn’t released any dividends report, investors are still willing to take a risk on this up-and-coming stock.

Trulieve Cannabis (OTC: TCNNF)

This is a cannabis grower and retailer, with its primary focus on the Florida medical cannabis market. Trulieve Cannabis dominates the sunshine state by accounting for nearly 50 percent of the total cannabis sales. It has also recorded consistent profits since 2017, a feat only a few cannabis companies can claim.

The company plans to acquire Harvest Health & Recreation. This move will significantly boost its presence in several other U.S. states. It will also make it the most profitable multi-state cannabis business in the country.

GrowGeneration (NASDAQ: GRWG)

GrowGeneration is an ancillary provider. It is also the largest retail chain solely focused on the cannabis market. The growing U.S. cannabis market has created a fast-growing demand for hydroponic systems. Hydroponic systems are used to cultivate the plants in a liquid nutrient solution as opposed to the transitional soil cultivation method.

Although the company focuses on cannabis growers, it also sells to other types of gardeners. GrowGeneration has greatly benefited from the Covid-19 pandemic that has seen a surge in consumers pursuing organic gardening at home.

Innovative Industrial Properties

Innovative Industrial Properties (NYSE: IIPR)

Cannabis companies can’t secure capital from financial institutions in the U.S. due to its illegality at the federal level. IIP helps solve financial problems for cannabis startups by buying their properties and leasing them back to them. The property sales provide the cannabis operators with much-needed income. And the lease agreements create a steady revenue stream for IIP.

The Covid-19 pandemic disrupted the company’s revenue stream, with three tenants receiving rent deferrals. But the company has still seen considerable growth throughout the pandemic. And since the company is listed as a real estate investment trust, it returns up to 90 percent of its taxable income to shareholders.

The Bottom Line

The cannabis industry is perhaps the most profitable venture right now. The mere fact that it is still young means its potential for growth is virtually unlimited. That being said, investing in cannabis stocks is still pretty risky. But, if you do your research and invest in the right companies, you’re sure to reap big from your investment.

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