What if I were to tell you about a product that was ideally positioned to capitalize on the aging of our population? What if I were to tell you that, in 2017, despite limited access to the product, consumers in the United States spent more for it than they did on ice cream? And what if I were to tell you that some industry analysts are suggesting that the market for these products could double by 2020?
Would you be interested in that investment?
Now, what if I were to tell you that the product I'm referring to is considered legal in most states, but still considered an illicit drug by our federal government? And that your best opportunities for investing may lie in foreign companies and companies that are not listed on any of the major stock exchanges?
Would you be interested in that investment?
In broad strokes, that is the state of the marijuana industry. For investors, there is an undeniably large upside, and yet it is an industry that still faces tremendous headwinds that add a hefty risk premium. Every day, if not multiple times a day, my inbox gets an email advising me to get in on the latest pot stocks or on the opposite end, to stay away from cannabis companies altogether. It’s the ultimate risk-reward industry.
But is it for you? Should these stocks occupy any space in your portfolio? Those are some of the questions we’re considering in this article. Read further to learn more about how you can invest in marijuana stocks for 2018 and beyond.
Are marijuana stocks and companies a viable market?
Most industry analysts would answer this question with a qualified “Yes”. That’s because the product is controversial, to say the least. It’s a drug that’s been around forever, but unlike a drug being developed by a pharmaceutical company, marijuana has been considered illegal since the 1930s. This leads to a polarizing conversation and debate. As with many social issues, countries like Canada and Germany have more readily embraced the idea and made the sale of marijuana legal on a national level. Not surprisingly, they are home to profitable businesses including Aphria and Canopy Growth.
However, here in the United States, the debate about marijuana’s use for medicinal and/or recreational purposes continues. Over 30 states have laws that permit the legal use of marijuana for medicinal purposes and some of those states are beginning to allow marijuana to be sold for recreational use. So there is momentum growing, but that momentum is being slowed by concerns that the federal government will seek to involve themselves in the affairs of states that have legalized recreational or medicinal marijuana. And while the Trump administration seems solidly behind minimizing federal intervention into the industry, it’s a story that’s still being written.
What qualities should investors look for?
Simply put, when looking at marijuana stocks, you’re looking for the same fundamentals that you would with any other business including their growth opportunities, earnings, the quality of the product, their location and their management team.
When you’re considering a company’s potential for growth in this market, you have to pay attention to its size and scope. With the opportunity for profit to be made, it’s logical that more and more companies are entering the market. As any investor knows, when there are more players in the game, prices go down and margins become tight, particularly for smaller businesses. So when you’re looking at marijuana stocks, you should look at the major producers. And right now, that means looking north of the border.
Canopy Growth (NYSE: CGC), Aurora Cannabis (NASDAQOTH:ACBFF) and Aphria (TSE: APH) are three of the largest growers in Canada. All three of these companies have the production capacity to make them major players for years to come. And remember, although these are Canadian companies, their outreach is not limited to Canada. As more countries relax their laws on the use of medicinal or recreational marijuana, these companies stand to profit by having the supply to meet the demand. Furthermore, these companies can supply the raw material needed for the growing market for cannabis-infused products.
Another fundamental to look at is the quality of the product itself. Do they use patented technology? Do they have another competitive advantage? In marketing terms, what is their unique selling proposition? In this way, marijuana stocks are likely to mirror spirit manufacturers. There will be “top shelf” products and others that belong in the well. Many consumers will be willing to pay a premium for the quality offered by a specific brand. And while branding may not be an attribute that technical analysts look at, it certainly will play a role in marijuana marketing. In this regard, Canopy is a good stock to look at. They have a strong brand presence with Tweed, even partnering with entertainer Snoop Dogg to add to its popularity.
A third consideration is an access to the market. Complicating the growth of cannabis companies is that many states restrict the number of licenses they grant to growers, producers, and dispensaries of marijuana. For example, the state of Florida amounts to 14% of the U.S. medical marijuana market. However, only 11 such licenses have been granted in the state. That's equal to one license for every three million people. While this is a barrier to entry, it also creates an opportunity for companies that can get licensed in key markets.
Finally, look at the management team itself. Does their management team have key expertise in the field? Who is responsible for producing the product? This is particularly true for companies that are getting involved with medicinal marijuana. Do they have in-house authorities on CBD medications or with conducting clinical trials?
What challenges do marijuana stock investors face?
Despite the fact that many states In the U.S. have legalized marijuana for either recreational or medical uses, marijuana is still considered illegal by the Federal government. The DEA classifies cannabis as a Schedule 1 drug, which presents a challenge to companies who will face scrutiny from the major stock exchanges as well as the SEC.
This also presents a problem for these companies as they try to raise capital. Imagine that you had a business in an industry where consumers were spending more on the product than they were spending on ice cream. Furthermore, the industry was looking to expand, and perhaps double in size, within two or three years. Chances are, banks and hedge funds would be throwing money at you as they looked to invest in your business.
That’s not the case for cannabis companies.
Because of the scrutiny they receive, commercial and investment banks steer clear of them. It’s not because they don’t want to invest. The big banks know there’s money to be made. However, when faced with unwelcome consequences, possibly of the criminal variety if they were to extend these businesses a line of credit or allow them to open a checking account, banks are taking a hard pass. It appears that the Trump administration wants to make it easier for banks to do business with marijuana companies as long as they comply with respective state laws. However, this is a book with many chapters still to be written.
A second issue that marijuana companies face is taxation. While the government is making it difficult for these companies to raise needed capital, they have no issue with ensuring they pay their taxes. Although the federal government considers the product of these companies to be illegal, they still ensure that the income generated by these companies is taxed. In addition to that, as part of the tax code, businesses that sell an illicit substance are prohibited from taking normal corporate income tax deductions. So these companies can face an effective corporate income tax rate that can be as high as 90 percent.
Faced with the double whammy of being treated as a pariah by both the major stock exchanges and the major financial institutions, marijuana companies seek funding through alternative funding sources and have gone public on over-the-counter exchanges. Two of the largest over-the-counter funding sources are Canna Royalty (OTCMKTS: CNNRF) and iAnthus Capital Holdings (OTC: ITHUF). But going through alternative sources presents its own challenges. A cannabis company that is publicly traded on an over-the-counter exchange will not be scrutinized on the same level as companies that are on the major exchanges. This raises a red flag for many investors who see the over-the-counter exchanges as the domain of penny stocks and other riskier investments.
How to invest in marijuana companies?
The first rule of thumb to follow is that putting your investment dollars into this sector is about investing, not trading. It is not a market where you are likely to get rich quick and you could be setting yourself up for substantial risk if you are not careful. Headlines like this abound:
“The best ground floor opportunity we’ve seen since the early days of the Internet.” – Forbes
“The fastest growing industry in the world.” – The Chicago Tribune
As we've explained, there's plenty of reason to be excited about the opportunities this sector provides. And when you consider the market is in its infancy, now may be a perfect time.
However, the adage “let the buyer beware” quickly comes to mind. As with any kind of investment, quality matters. As the market for these products expands, there will be more small companies entering the market. But without access to capital and small production facilities, these companies can present particular risks, similar to penny stocks.
For example, many of these companies will advertise themselves by buying endorsements from publishers of investment newsletters. This is a classic technique used by companies when they are looking for capital. Because many of these smaller companies are not traded on the major exchanges, it may be difficult to find information on them. Do they regularly put out news? Do they have an investor relations department that will respond to your requests?
The dawning of the internet may be a very apt comparison for the marijuana industry. However, many investors remember how their portfolios were shredded when many startup “dot com” companies disappeared as quickly as they came on the scene.
Fortunately, as with any sector, you have the option to purchase mutual funds. There are two major Exchange Traded Funds (ETFs) that trade on major stock exchanges. The Horizons Marijuana Life Sciences Index (OTC: HMLSF; TSE: HMMJ) and the ETFMG Alternative Harvest ETF (NYSE: MJ). These funds will give you access to quality companies that have been researched by analysts who have done their due diligence in recommending these stocks.
But there are other ways you can look to capitalize on the marijuana market. One way is to look beyond growers and into their suppliers. For example, Kush Bottles sells packaging supplies to U.S. marijuana dispensaries and growers. And Scotts Miracle-Gro has been actively acquiring small hydroponics companies, putting themselves into position to be a go-to supplier.
Another way to play marijuana stocks is to look at the emerging trend for cannabis-infused products. Here leading alcohol manufacturers are beginning to make major investments. Constellation Brands bought a nearly 10 percent stake in Canopy Growth. And Molson Coors Brewing is also reportedly looking to invest and partner with Canadian growers.
Marijuana Stocks to Get You Started
Canopy Growth (TSE:WEED)
Market Cap: C$6.35 billion - Canopy Growth Corporation, together with its subsidiaries, engages in growing, possession, and sale of medical cannabis in Canada. Its products include dried flowers, oils and concentrates, soft gel capsules, and hemp.
Terra Tech (OTCMKTS:TRTC)
Market Cap: $138.87 million - Terra Tech Corp. operates as a vertically integrated cannabis-focused agriculture company. The company operates in two segments, Herbs and Produce Products; and Cannabis Dispensary, Cultivation, and Production
Terra Tech Corp (OTCMKTS:TRTC) posted its quarterly earnings results on Thursday, May, 12th. The industrial products company reported ($0.01) EPS for the quarter.
22nd Century Group (NYSEAMERICAN:XXII)
Market Cap: $316.82 million- 22nd Century Group, Inc., a plant biotechnology company, provides technology that allows increasing or decreasing the level of nicotine and other nicotinic alkaloids in tobacco plants, and cannabinoids in hemp/cannabis plants through genetic engineering and plant breeding.
Cannabis Science (OTCMKTS:CBIS)
Market Cap: $190.59 million- Cannabis Science, Inc., together with its subsidiaries, develops, produces, and commercializes phytocannabinoid-based pharmaceutical products primarily in the United States. The company is developing medicines for autism, blood pressure, cancer, cancer side effects, and other illnesses, as well as for general health maintenance.
Market Cap: C$536.91 million- OrganiGram Holdings Inc., through its subsidiaries, produces and sells medical marijuana to individuals and physicians in Canada. It offers marijuana plants, seeds, and cuttings; cannabis oil; and dried flower and cannabis.
OrganiGram is scheduled to release their next quarterly earnings announcement on Monday, December, 17th 2018.
United Cannabis (OTCMKTS:CNAB)
Market Cap: $67.44 million - United Cannabis Corporation owns intellectual properties related to growth, production, manufacture, marketing, management, utilization, and distribution of medical marijuana and marijuana-infused products in the United States.
Medical Marijuana (OTCMKTS:MJNA)
Market Cap: $325.25 million - Medical Marijuana, Inc., an investment holding company, operates in the medical marijuana and industrial hemp markets. Its products range from patented and proprietary based cannabinoid products to seed and stalk or isolated high value extracts manufactured and formulated for the pharmaceutical, nutraceutical, and cosmeceutical industries
Cannabis Sativa (OTCMKTS:CBDS)
Market Cap: $100.69 million- Cannabis Sativa, Inc., through its subsidiaries, develops, manufactures, and sells herbal-based skin care products in the United States and internationally. The company offers Recover, a deep penetrating healing balm used to relieve pain for sore muscles, joints, arthritic, and back pain; Trauma Cream, a cream for blended infusion of cannabinoids and THC
Marijuana Company Of America (OTCMKTS:MCOA)
Market Cap: $58.27 million - Marijuana Company of America, Inc., through its subsidiaries, develops, manufactures, and sells industrial hemp derived and non-psychoactive cannabinoids consumer products under the hempSMART brand in the United States and Canada.
Market Cap: $23.37 million- MassRoots, Inc., together with its subsidiaries, operates a technology platform for the medical cannabis community in the United States. Its platform enables users to share their cannabis content, follow their favorite dispensaries, and stay connected with the legalization movement.
MassRoots is scheduled to release their next quarterly earnings announcement on Monday, August, 13th 2018.
General Cannabis (OTCMKTS:CANN)
Market Cap: $91.17 million
General Cannabis Corp provides products and services to the regulated cannabis industry in the United States. The company operates through four segments: Security and Cash Transportation Services (Security), Marketing Consulting and Apparel (Marketing), Operations Consulting and Products (Operations), and Finance and Real Estate (Finance).
General Cannabis Corp (OTCMKTS: CANN) issued its quarterly earnings results on Wednesday, August, 8th. The company reported ($0.10) earnings per share (EPS) for the quarter.
It's hard to ignore the potential for this market. The medical marijuana niche is currently a small niche but is poised to grow into a massive industry if medical marijuana becomes the law of the land in its largest potential market, the United States. Some analysts project that the marijuana industry could be valued at over $475 billion.
And that’s not taking into account what will happen if marijuana is widely approved for recreational use.
So let’s go back to that question.
Would you be interested in this investment?
By looking for reputable companies that are well positioned to keep up with a surge in demand, have the marketing dollars to put behind their brands, have the access to capital they need to weather the initial storms, and have a management team that provides expertise, you may find that now is an ideal time to jump into this market.