An American’s Guide to Investing in Cannabis Stocks

Cashing in on the growth of this once-underground industry

Cannabis plant
•••

 Getty Images/Joseph EID

Pot can now be a legit moneymaker. 

The relaxation of U.S. state laws relating to the use of marijuana—also known as cannabis—has created a new industry for entrepreneurs, as well as a potential new industry for investors. 

As of 2019, 33 states allow cannabis use in some form, and 11 states and the District of Columbia allow adults to use cannabis recreationally. It is an industry now worth billions of dollars, with projections of rapidly increasing spending over the next five years. Common products available recreationally include edibles (such as gummies), beverages, clothes from hemp, cannabidiol oil (CBD), and even skin creams.  

That said, marijuana is still illegal in the United States at the federal level and classified as a Schedule 1 controlled substance, in the same category as LSD and heroin.

Recent concerns over the health risks of cannabis in vaping products have also injected some uncertainty into the industry. 

“Cannabis-related businesses must carefully consider a host of potentially conflicting licensing, regulatory, and compliance issues,” notes Epstein Becker Green, a law firm that offers legal counsel to cannabis-related businesses. “In addition, cannabis industry stakeholders, such as financial services organizations, should be familiar with associated risks.”

A Growing, Uncertain Industry

Regardless of risks, maybe believe the cannabis industry is on the verge of tremendous growth. 

Industry analyst Cowen Inc. projects the CBD industry alone will hit $16 billion by 2025, while BIS Research pegged the value of the cannabis industry at $13.21 billion in 2018, and predicted it would grow to $36.7 billion in 2025. 

While cannabis is a fledgling industry, it should not be viewed as a monolith. Already, it has become segmented due to the various applications and uses for cannabis products. 

Analysts suggest that the cannabis industry can be broken into as many as eight segments.

  • Cultivators: These are the companies that actually grow and sell cannabis plants. This includes those using traditional farming techniques and hydroponics.
  • Consumer and retail: The producers of cannabis products sold in stores and online, including CBD oil, skin care products and even dog treats. 
  • Financial business and services:There is a whole cottage industry of companies that offer services to those developing cannabis products, from consulting on employee retirement plans to assistance with lending. 
  • Research and testing: If companies are going to sell cannabis products, other firms can make money by testing them for purity, potency, and defects. 
  • Equipment and devices: Many companies are involved in manufacturing equipment to help with hemp cultivation, while others offer ways to extract oils from cannabis. 
  • Real estate: This segment includes companies that invest in farmland for cannabis and help companies comply with various regulations governing how cannabis crops can be grown.
  • Processors: These are companies involved in infusing cannabis into other products. For example, the creator of a cannabis edible brownie is considered a processor. 
  • Post-processing: Many of these companies are involved in a process called distillation, in which cannabis compounds are isolated to make a potent concentrate. 

How to Buy Cannabis Stocks

If you’re keen to invest in the cannabis industry, keep in mind that it’s not as easy as investing in, say, Coca-Cola.

There are currently 68 companies listed on the North American Marijuana Index, which tracks companies with “significant business activities” in the marijuana industry. However, very few of these stocks are traded on major U.S. stock exchanges, due to the still-unsettled regulatory environment and because most companies are still very small. 

Artivest, a platform for alternative investing, notes that in North America, most investment in cannabis stocks is available through private equity, over-the-counter markets, or the Canadian Securities Exchange

If you want to buy shares of a company that trades on a smaller or over-the-counter exchange, keep in mind that shares may not traded as frequently, and, as a result, getting accurate and fair pricing can be a challenge. 

If you aren’t looking to buy shares of individual cannabis companies, you can also consider buying shares of exchange-traded funds such ETFMG Alternative Harvest ETF (MJ) or Horizons Marijuana Life Sciences ETF (HMMJ), which will give you exposure to multiple firms in the industry.

The Risks for Investors

Investors in cannabis stocks need to be comfortable with risk. Like most very small stocks, especially those in a regulatory-challenged industry, these stocks have been volatile. The ETFMG Alternative Harvest ETF, for example, rose from about $26 per share from nearly $40 per share from mid-2018 to early 2019, then fell to just $18 by late 2019.

Artivest also notes that cannabis stocks often trade at very high prices, given the sales of the underlying companies. For example, MedMen, a cannabis cultivator and retailer in Los Angeles, had shares selling for a 100 times multiple of sales. At one point in 2018, the company was selling for nearly $5 per share despite having just $11 million in revenue in the previous 12 months, and an operating loss of more than $33 million. 

The Bottom Line

Cannabis is a growing industry, and it’s increasingly possible to invest in companies and make money yourself. The relaxation of laws in many states regarding medical and recreational marijuana use has allowed entrepreneurs to try their hand at producing everything from cannabis plants to oils, edibles, beverages, and more. However, the regulatory environment around cannabis is still unsettled, bringing uncertainty to the marketplace. Moreover, cannabis stocks are still not widely traded on major exchanges and accurate pricing information is hard to come by, so investors should proceed with caution. 

Article Sources

  1. Governing.com: State Marijuana Laws in 2019 Map, updated as of June 25, 2019 

  2. Research and Markets: Cannabis Industry Analysis and Forecast, 2019-2025 

  3. BDS Analytics: What Was Hot in Pot in 2018: Top 10 Cannabis Product Trends 

  4. United States Drug Enforcement Administration: Drug Scheduling, Accessed Nov. 18, 2019

  5. Epstein Becker Green: Cannabis Business 

  6. Cowen’s Collective View of CBD 

  7. Artivest: Five Things Every Cannabis Investor Needs to Know, page 9 

  8. Solactive: North American Marijuana Index, as of October 2019 

  9. Artivest: "Five Things Every Cannabis Investor Needs to Know," page 9 

  10. Yahoo Finance: ETFMG Alternative Harvest ETF (MJ), accessed Oct. 10, 2019 

  11. Artivest: "Five Things Every Cannabis Investor Needs to Know," page 10