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How to Invest in Marijuana Stocks

Here are seven steps to investing in the high-flying cannabis industry.

Global marijuana markets are growing like a weed. Worldwide spending on cannabis is on pace to top $29 billion in 2020, according to Statista. The total is projected to increase to $63.5 billion by 2024, for a compound annual growth rate (CAGR) of 21%. With this type of impressive growth, it’s no wonder that many investors are interested in publicly traded cannabis stocks.

What’s the best approach to marijuana investing? There are seven key steps:

Here’s all you need to know about this seven-step process for investing in the fast-growing marijuana industry.

Image source: Getty Images.

1. Understand the types of marijuana products

There are two broad categories of cannabis products:

  • Medical marijuana: Medical marijuana is broadly legal in 35 U.S. states plus the District of Columbia and in over 30 countries. A prescription from an authorized healthcare provider is typically required for patients to obtain medical marijuana; it’s frequently prescribed to adults for anxiety, depression, pain, and stress.
  • Recreational marijuana: Fifteen U.S. states plus D.C. have legalized recreational marijuana for adult use. Recreational marijuana has been legal in Canada since October 2018 and legal in Uruguay since 2014.

2. Know the different types of marijuana stocks

There are also different types of marijuana stocks, and the three primary ones are:

  • Cannabis growers and retailers: These companies, which include Canopy Growth, cultivate cannabis (often in indoor facilities and greenhouses), harvest the crops, and distribute the end products to customers. Some also focus on operating retail stores for selling medical and/or recreational cannabis.
  • Cannabis-focused biotechs: These are biotechs (such as GW Pharmaceuticals) that develop cannabinoid drugs.
  • Providers of ancillary products and services: These companies support marijuana growers by providing products and services such as hydroponics products and lighting systems (a key area of focus for Scotts Miracle-Gro), packaging services, and management services.

3. Understand the risks of investing in marijuana stocks

Investing in any type of asset comes with some degree of risk. However, investing in marijuana stocks has specific risks you should understand.

  • Legal and political risks: Selling marijuana remains illegal at the federal level in the U.S. In addition, U.S. federal law places severe restrictions on banks that deal with marijuana-related businesses. As a result, it’s difficult for U.S. cannabis businesses to access critical financial services. Political support has increased for federally legalizing or decriminalizing marijuana, but there’s no guarantee either action will happen.
  • Supply/demand imbalances: Canadian marijuana growers initially undertook major expansion initiatives to increase production capacity to meet recreational marijuana demand. However, some companies have now cut back production. When supply outstrips demand, prices usually fall. In this scenario, marijuana growers could find their revenue and earnings decreasing, which would hurt their stock prices.
  • Over-the-counter (OTC) stock risks: OTC stocks don’t have to file regular financial statements, which are important for investors, enabling them to assess the risk of the stocks. They also don’t have to maintain minimum market caps (the total value of outstanding shares), which can result in a low level of liquidity (how easily the stock can be bought or sold without its price being affected).
  • Financial constraints: Many cannabis companies are unprofitable and face the prospect of running out of cash. They often have to raise capital by issuing new shares, which dilutes the value of existing shares. Even with this option, obtaining enough capital to fund growth can be challenging.

4. Know what to look for in a marijuana stock

When considering any marijuana stock to invest in, you should:

  • Research the management team
  • Examine the company’s growth strategy and competitive position
  • Check out the company’s financials
  • Research how many warrants and convertible securities the company has issued (a high number could mean that the stock will be diluted in the future, potentially causing the share price to drop)

Specific metrics to research for marijuana growers include:

  • All-in cost of sales per gram: Includes all costs of producing cannabis
  • Cash cost per gram: Includes all costs of producing cannabis except amortization, packaging costs, and inventory adjustments

Marijuana growers with lower cost structures will tend to be more competitive.

5. Evaluate the top marijuana stocks and ETFs

Now for the fun part: digging into the top marijuana stocks. You might also want to check out marijuana-focused exchange-traded funds (ETFs).

Below is a list of top marijuana stocks and ETFs to consider. Note that this list isn’t comprehensive, and includes only marijuana stocks with a market cap of at least $200 million.

Here are seven steps to investing in the high-flying cannabis industry.