How to Invest in Marijuana Stocks

Now that Canada has fully legalized marijuana and the majority of U.S. states have legalized either medical and/or recreational use, the business of selling weed is moving into the big leagues. While the business is complicated by marijuana’s continuing illegality under U.S. federal law, the industry’s stocks can be approached just like any other emerging asset class in an industry that is only starting to mature.

With predictions that legal cannabis sales in the U.S. could reach $22 billion annually by 2022, there’s increasing interest in investing in this burgeoning and quickly transforming sector. U.S. cannabis stock is now valued at a total of $14 billion.

However, the industry is still in its infancy. Only two mult-state U.S. cannabis companies—Harvest Health ($4 million) and Trulieve ($32 million)—have made a profit. And as with any investing, it's never a good idea to go "all in" on one type of stock, drug-related or otherwise. It's better to maintain a diversified portfolio, investing in a large cross-section of the market. Weed stocks can certainly be a part of that.

A portrait of marijuana stocks

As with other emerging asset classes, the marijuana industry is composed of a mix of sophisticated operators with experienced management teams and inexperienced entrants that present greater risks.

Investing based on valuation might not the best strategy for this industry; the field is changing so rapidly. So what do you look at? You could consider how a given company is strategizing and evolving. For example, some are striving to become larger consolidators and leaders. The future of these companies — nobody knows what it holds.

In investing in marijuana companies, you can choose to buy stock of bigger, multi-state companies that control several or even all stages of production, or target companies in various niches of the industry. There's no way to tell which type of company will bring you the best returns. Do some research on the subsectors of the industry, such as cultivation, real estate, procurement, processing, and distribution, to take a guess as to which might be most profitable.

Whichever strategy you take for investing in weed stocks, diversification is essential, according to CNBC's Tim Seymour. It’s a good idea to spread small investments across the industry, which can be accomplished by individual trades or by buying a cannabis-focused exchange-traded fund (ETF), of which there is a limited but growing number.

How to start investing in marijuana stocks

Investing in marijuana stocks is no different than any other kind of investing. You make your best guess as to which stocks will be successful, then sit back and see what happens. There are some complicating factors in the cannabis field that other stocks may not be subject to, but the process of buying these stocks is the same. Here are the steps:

1. Decide how much you want to invest in cannabis

The first step in investing in cannabis is deciding how much of your portfolio you want to dedicate to this new and potentially risky option. There is so much movement and so many unknowns in the industry that it is ill-advised to invest your entire fortune in marijuana.

Mixing asset types allows you to control the level of risk in your portfolio, which is a decision that should be based on personal comfort level. There is no objective “right” or “wrong” way to allocate assets; each allocation mix simply exposes you to relatively greater or lesser potential for loss or gain. At this early stage in its development, the cannabis industry is likely to carry more risk, so consider that when deciding how much of your investment dollars to dedicate.

2. Understand the risks of investing in marijuana

The risk associated with marijuana stocks is partly related to its illegality at the federal level in the U.S., the fledgling nature of the legal industry at the state level, and the illicit associations some operators may continue to maintain even after legalization.

One such risk is self-dealing, such as insider trading, allegations of which has plagued some prominent players in the space. For example, MedMen (MMEN), a major U.S. firm that has positioned itself as a reputable, high-end supplier, is facing a $20 million lawsuit alleging that its top executives breached duties and enriched themselves at the expense of shareholders. Other companies, such as Canadian firm Marrican Group, are facing investigations of wrongdoing.

It’s worth contemplating that the legalized cannabis industry is only a few years removed from being a criminal enterprise, and as a result some of those doing business in the space may be inclined toward practices that are … let’s just say “investor-unfriendly.” Though it’s important to note that the vast majority of operators are legitimate and ethical businesspeople.

3. Set a budget

The next step is deciding how much specifically to invest in this sector. Considering the risk involved, it’s smart to only invest money you can afford to lose—a principle that applies to virtually any investment. Start out with a small fraction of your overall investment amount until you become more familiar with the space, its operators, and its evolution.

4. Do some research

As a result of the unevenness of the field, potential investors will do best to obtain as much information as possible about each company they’re considering investing in. It’s a challenge to get adequate information about players in the cannabis sector due to the lack of traditional sell- and buy-side research and the opacity of some of the operations.

Howeve, there’s plenty to be learned via public filings, such as the status of legal partnerships and who owns the assets. Take time to research the legislative environment in each company’s markets; in the U.S. industry, where licensing varies by state and interstate transport is forbidden, the status of each company’s legal operations in a given geography will be important information.

As in other industries, marijuana businesses operate in a variety of ways. Some are focused on a single state (such as Trulieve Cannabis—TRUL—in Florida), while others are working to get established in many states where marijuana is legal and throughout Canada.

Many companies are in their infancy and not yet drawing robust profits; a better way to judge their potential for growth is the number of licenses they’ve acquired. Acreage Holdings (ACRG.U), a company known for having conservative politicians as advisors, currently has the largest number of licenses, with 79 retail licenses across 19 states. Harvest Health & Recreation (HARV.CN) has 86 licenses in 12 states, and Green Thumb Industries (GTII) has 83 in 10 states.

It's important to keep in mind that no matter how much research you do, there's no way to know for sure how any given stock will perform. Self-directed investing is inherently risky because it involves a lot of guesswork. Picking stocks in the marijuana market is no different.

5. Execute the trade

If you don’t have a stock broker already, look for one who charges low fees. Fees can add up extremely fast; only 1-2% in fees, can reduce your expected investment returns by up to 40%. Give your broker the information about how much of each stock you’d like to buy.

Examples of marijuana stocks to invest in

While the field of publicly traded cannabis companies is limited, there are still a range of good options to choose from, including companies focused on medical marijuana. Don’t just go for the big operators; be patient and do your research as the field evolves.

Due to the product’s federal restrictions, U.S. cannabis companies typically do not sell shares on exchanges like NASDAQ or the New York Stock Exchange, which have rigid transparency and accountability guidelines. These companies instead list in the Canadian Securities Exchange or sell over-the-counter via the OTC Markets Group in the U.S. Those U.S. companies that do sell on the major U.S. exchanges typically aren’t “pure play” cannabis companies: those whose central business is cannabis provision. Instead such companies tend to be in biotech, agriculture, or marijuana accessories. While we know you're eager to learn more about weed stocks, you should know that Wealthsimple does not endorse investing in any of the examples listed below.

Exchange-traded funds

If you’d rather not choose individual stocks yourself but are interested in investing in the industry, you might consider a weed-focused exchange-traded fund, such as Horizons Emerging Marijuana Growers Index (HZEMF (https://www.bloomberg.com/quote/HZEMF:US)) or AdvisorShares Pure Cannabis ETF (YOLO (https://www.cnbc.com/2019/04/23/cannabis-etf-with-ticker-yolo-offers-new-way-to-play-pot-stocks.html)).

Major players

Canopy Growth (CGC) and Cronos (CRON) are established and have highly valued stock, in part because the companies that own Corona beer and Marlboro cigarette brands have invested in them.

Additional big firms in this space:

• Curaleaf Holdings (CURA.CN)

• Acreage Holdings (ACRG.U)

• Green Thumb Industries (GTII)

• MedMen Enterprises (MMEN)

• Harvest Health & Recreation (HARV.CN)

• Trulieve Cannabis (TRUL)

• iAnthus Capital Holdings (IAN:CN)

Other not-as-major options

• Organigram (OGRMF),

• The Green Organic Dutchman (TGODF)

• CannTrust (CTST)

• Aphria (APHA)

• Hexo (HEXO)

• KushCo Holdings (KSHB)

• Sunniva (SNN.Canada)

• Tilray Inc. (TLRY)

Biopharmaceutical and medical marijuana stocks

• Arena Pharmaceuticals, Inc. (ARNA)

• Cara Therapeutics Inc. (CARA)

• Corbus Pharmaceuticals Holdings Inc. (CRBP)

• GW Pharmaceuticals Plc. (GWPH)

• Insys Therapeutics Inc. (INSY)

• Intec Pharma Ltd. (NTEC)

• Therapix Biosciences Ltd. (TRPX)

• Zynerba Pharmaceuticals Inc. (ZYNE)

Marijuana-related real estate companies

• Atlantic Alliance Partnership Corp. (AAPC)

• Innovative Industrial Properties (IIPR)

Why people invest in marijuana stock

There is robust interest in investing in the cannabis industry because of the expectation of rapid growth as legalization spreads around the country. The 2018 edition of the Marijuana Business Factbook states that retail sales of marijuana are likely to reach $8-10 billion this year, a 50% increase from 2017, and that they have the potential to spring up as high as $22 billion by 2020.

The opportunity seems huge and exciting, and the industry is changing rapidly, leading to plenty of investor anticipation. Those with an interest in getting in on the ground floor of a potentially extremely lucrative industry may be drawn to investing in weed.

Background of the marijuana industry

The federal laws that sought to regulate marijuana use in the U.S. were first introduced in 1937 in the Marijuana Tax Act, which levied a tax on cannabis use instead of outlawing it. However, within 15 years, Congress made it illegal, doing so via the 1952 Boggs Act. The 1970 Controlled Substances Act divided drugs up into classes purportedly based on their potential for harm. Richard Nixon was outspoken against the weed-fueled counterculture of the 60s and 70s, contributing to it being labeled a “Schedule 1” substance, like heroin and LSD.

These restrictions made it difficult for medical professionals and researchers to access marijuana to assess its pain-relieving and curative properties, leaving it largely to individuals accessing it on the black market to start a movement for its decriminalization for medical use. This movement gained steam and began influencing state lawmakers, who eventually began passing state laws to legalize medical use, followed by recreational use.

In 1996, California became the first state to institute a legal medical marijuana program. Within a decade, 11 states had done so, and 33 have such laws as of 2019. The first full adult-use legalization occurred in Washington and Colorado in 2012, quickly followed by D.C., Alaska, and Oregon in 2014. Since then, seven more states have signed on for full legalization. A handy map created by the National Conference of State Legislatures shows the patchwork of cannabis laws in the U.S.

America’s mishmash of state regulations makes it difficult to do business in the cannabis industry on any kind of scale. Federal law prohibits transporting weed across state lines, and many states outlaw wholesale distribution. Banking regulations cause headaches and encourage doing business in cash, which brings a host of complications and risks to the industry.

Canada, meanwhile, has a longer history of legislating cannabis; it was first made illegal in 1923 along with opium, cocaine, and morphine. Things started to change in the early 2000s, with a 2001 law allowing licensed patients to grow their own or otherwise secure medical marijuana. Soon after, came a couple attempts to decriminalize the drug completely, which failed in parliament.

A regulated medical marijuana industry was legalized throughout the country in 2013, and weed became entirely legal in October 2018 via The Cannabis Act, which created federal laws to restrict the production, distribution, sale, and possession across Canada.

Cannabis investors: cautious but optimistic

Those interested in investing in marijuana stocks have a lot to be optimistic about; they’re tapped into a transformational industry that has incredible growth potential. The industry is still in the early days, however—much could change, for better or worse—and it’s almost impossible to predict how these stocks will perform.

If you're drawn to weed stocks and want to give investing in this sector a try, then by all means take your best shot at getting a... high return. But as always, it's never a good idea to go “all in” on any particular type of stock, even if—or maybe especially if—it's the latest, most exciting thing on the market. So proceed with caution; and beware of investing under the influence.

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