10 Questions You Need to Ask Before Investing in Marijuana Stocks

Marijuana StocksMarijuana Stocks Overview

Weed is a commonly used substance in North America, yet it remains taboo in most communities. Until very recently, this “sin substance” has been kept in the shadows. But the rise of marijuana stocks is changing everything. Legalisation is sweeping across the nation.

Many investors are excited (rightfully so) about this opportunity to multiply their money. Those who invest in marijuana stocks could easily make 400% or 500% within one year. Many already have.

But before you rush off to invest in every marijuana stock you can get your hands on, remember to ask yourself the essential questions about investing in marijuana stocks.

This is a young industry. There are relatively few players fighting over the $6.0 billion pie of revenue. However, the winners stand to inherit a ton of growth; estimates peg the potential size of marijuana sales at $50.0 billion per year by 2026.

Obviously, going from $6.0 billion to $50.0 billion in under a decade suggests that these stocks have significant upside.

This opportunity is clear as day, but many analysts are constrained by politics. Some dislike the idea of legal weed, because it runs counter to their idea of a civilized society. Others are unsure about whether the legalization will continue. I just look at the data and try to give you facts.

So before you empty your savings account, ask yourself the following questions.

1. What Are the Risks of Marijuana Investing?

Investing in marijuana stock is not a “sure thing” or “100% guarantee”—those are a conman’s words. There is risk involved in any investment, and people should know that. Marijuana stocks are no different than any other asset class in this regard. No risk, no reward.

To be specific, there is a lot of “political risk” surrounding the industry. For instance, cannabis is still a Schedule 1 drug under the Controlled Substances Act of the United States. This means that it is technically illegal at the federal level.

So how are marijuana companies flourishing in states like Colorado and Oregon? Shouldn’t the FBI or the DEA shut them down? Actually, no.

After several states legalized recreational weed, the Department of Justice issued a new directive on drug enforcement. It basically green-lit (pun intended) the commercial sale of marijuana, albeit under tight restrictions. The states took this policy and ran with it.

But if the DoJ starts singing a different tune, marijuana companies could be at serious risk.

2. Are Marijuana Stocks Safe?

As an emerging growth sector, marijuana stocks are not advisable for conservative investors.

However, “safe” is a relative term. If you are an adrenaline-junkie who’s been sky-diving for years, then one more jump feels pretty safe. It’s just 1/100, right? But for someone like me, jumping out of a plane seems borderline insane. It feels much less than safe.

This relativism of safety applies to the stock market perfectly. High risk investors know that many of their bets will go bust, but they only need one big winner to make up for it. That’s their mentality, so emerging growth stocks are “safe” to them.

But if you cringe at a 0.10% drawdown in your portfolio, then maybe steer clear of these stocks.

3. How to Invest in Pot in the U.S.?

Investing in marijuana stocks can be done through public exchanges and over-the-counter markets. But more specifically, there are different corners of the weed market.

For example, there are medical marijuana companies, marijuana producers stocks, and marijuana services stocks.

A) Medical Marijuana Stocks are involved in the development, patenting, and distribution of cannabinoid-related drugs. These drugs are based off chemical properties found in cannabis, and are used in treating everything from cancer patients to chronic pain.

B) Marijuana Producers Stocks actually grow and manage “the plant.” They are the ones that will sell directly to consumers, which is what most of us think when we hear the words: “marijuana stocks.” They will profit from the pot boom.

C) Marijuana Services Stocks lend support to the categories above. Whether by providing real estate services or social media services, many of these companies are growing rapidly. Ironically, their success is due to the federal ban on marijuana. Because other firms are scared to business with weed dealers, these services stocks were able to carve out a niche.

For more information on these stocks, click here.

4. How Are Marijuana Companies Taxed?

Taxation is the downside of a federal ban on marijuana. IRS Code 280E allows Uncle Sam to tax a marijuana company’s sales minus the “cost of goods sold.” In other words, the government is marking gross profit, not net profit, as the total pie of taxable income.

To the best of my knowledge, this doesn’t happen to any other business in the U.S.! That means everything from marketing costs to research to debt payments are not taken into account. The government is squeezing them for every possible dollar.

5. Can Marijuana Companies Get Bank Accounts?

At present, many banks are reluctant to do business with marijuana companies. Financial institutions usually operate across the entire country, and are therefore regulated at the federal level. You can hardly blame them. But those who do take on marijuana-related clients must deliver Suspicious Activity Reports (SARs) for every transaction. That can be expensive.

My guess is that some ambitious firm will fill this gap. After all, marijuana stocks are seeping into the zeitgeist, they are becoming a visible asset class, and it won’t be long until someone realizes they can make a lot of money having cannabis clients.

6. Is Donald Trump in Favor of Marijuana Legalization?

In the past, President Trump has spoken negatively about marijuana use and marijuana legalization. But his administration seems to have drawn several lines in the sand, including one between medical and recreational uses. The other is between state and federal authority.

“I think it’s up to the states,” said Trump in an interview with a Denver television station back in August 2016. “I’m a states person. I think it should be up to the states, absolutely.” (Source: “Brandon Rittiman’s Trump interview transcript,” 9NEWS, August 3, 2016.)

This perspective is historically in line with the Republican party. The GOP have traditionally preferred that states govern themselves as much as possible, so that local values overrule the bureaucrats in Washington DC. As it happens, this decision would be good for investors.

If marijuana stocks simply grow on a state-by-state basis, they will soon become a regular feature of American commerce. Seeing dispensaries might seem as normal as seeing liquor stores, which would reduce the stigma and restrictions placed on the weed industry.

7. Are There Other Countries to Invest in?

Canada is a fast-growing market for marijuana stocks. Many entrepreneurs have got their foot in the door by selling medical marijuana, although full-scale legalization is expected to be introduced by the summer of 2017.

Prime Minister Justin Trudeau promised to legalize pot during his campaign, and after winning the election, his liberal majority government has repeated those sentiments. These comments have created a bullish environment north of the border.

There is a potentially lucrative market waiting for investors, not to mention that investing in Canadian marijuana stocks helps hedge against U.S. political risk.

8. Is It Too Early to Invest?

As in most cases, those who invest early are facing the biggest risks. That said, the gains could be correspondingly bigger as well, so some investors might think the time is ripe.

Others may feel the risk is too much and the temptation too little. Like I said earlier, some of these stocks could advance by 400% or 500%, but if those gains are not sufficient for some investors, then it may be too early for them to invest.

Perhaps those investors can re-examine the landscape after more states legalize recreational marijuana, or when (if) the federal government moves to legalize. In either case, the decision about whether it’s too early or late is one of risk tolerance. It’s up to you, dear reader.

9. What Are the Biggest Marijuana Stocks?

Here are five of the biggest pot stocks by valuation:

BIGGEST MARIJUANA STOCKS
Symbol Company Market Cap
GWPH GW Pharmaceuticals PLC $2.83B
WEED Canopy Growth Corp $1.70B
APH Aphria Inc $827.1M
ACB Aurora Cannabis Inc $638.5M
CARA Cara Therapeutics Inc $497.6M

However, any of these stocks can quadruple at any time, so this this list could flip on its head within six months. Once again, it’s important to remember that marijuana is an emerging growth industry. Nothing is locked in place for long.

10. Should You Invest in Marijuana Stocks?

It depends. I can’t stress this point enough, but only you know how much risk is enough. To be sure, there are stocks that have surged by more than 500%. Some investors have already walked away from marijuana stocks as millionaires, but this path isn’t for everyone.