Investing in Pot: Are Marijuana Stocks a Safe Investment?

marijuana stocks
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Is Marijuana Safe for Investment?

Spark it up. Nothing is as hot right now as marijuana stocks. There may be lots of room on the marijuana bandwagon but does that mean marijuana is a safe investment?

No investment is 100% safe. Just ask all those investors who piled their life savings into so-called safe investments like Nortel Networks Corporation, WorldCom, and Lehman Brothers Holdings Inc.

The marijuana sector is not 100% safe either, but it is just getting warmed up. Recreational marijuana use is now legal in Canada, other countries around the world are looking to do the same, U.S. marijuana sales (on a state level) are on the rise, and publicly traded marijuana stocks are reporting strong revenue growth and international expansion.

Risk-tolerant investors who aren’t afraid to roll up their sleeves and do some due diligence could realize strong short- and long-term gains.

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Should you invest in marijuana stocks? If you’re fine with investing in “sin stocks,” there are more than enough compelling reasons to delve into the marijuana sector.

The marijuana industry is in its infancy; there are a growing number of well-heeled marijuana stocks trading in Canada and the U.S.; many marijuana stocks have experienced meteoric gains over the last two years; and more and more countries, like Germany, Australia, and Israel, are expected to follow Canada’s lead with legalizing recreational marijuana.

While recreational pot use remains illegal on the federal level in the U.S., the U.S. marijuana market is still projected to hit $23.4 billion by 2022. Who knows what it will be when recreational use of marijuana becomes legal on the federal level. The potential is massive. (Source: “Legal Marijuana Markets Projected to Reach $23.4 Billion, Employ Nearly a Half-Million Americans by 2022; Effective End of Federal Prohibition is in Sight,” The Arcview Group, June 28, 2018.)

Again, however, marijuana stocks are not a 100% safe investment. Investors need to understand the weed market and have a thorough understanding of the company they want to invest in.

The biggest appeal though, is getting involved in a massive industry that is on the ground floor with almost unlimited potential.

Even without economic input from the U.S. on a federal level, North American marijuana sales have been stellar. In 2017, North American legal marijuana sales topped $9.7 billion, a 33% increase over 2016. By 2022, the U.S. marijuana market is projected to hit $23.4 billion and global spending on legal marijuana is expected to hit $32.0 billion. (Source: Ibid.)

A different study projects that global sales from the legal marijuana market will reach $146.4 billion by the end of 2025. In addition to recreational tokers, that growth will be fueled by the expanding adoption of marijuana in medical research, including for cancer, chronic pain, and mental disorders. (Source: “Legal Marijuana Market Worth $146.4 Billion by 2025 | CAGR: 34.6%,” Grand View Research, April 2018.)

While countries like the U.S., Canada, Australia, and Germany will be leaders in terms of sales, countries like Israel are more focused on research and development.

Suffice it to say, there will be some marijuana stocks that do exceptionally well over the coming years. Investors who zero in on those particular stocks could be rewarded with spectacular gains over the next few years.

U.S. Marijuana Legalization

The projections for legal U.S. marijuana sales are incredible, but they don’t really factor in the potential revenue that would come if it becomes legal on a federal level.

Global legal marijuana sales could triple over the next four years and then skyrocket after that. Many analysts believe that the U.S., the world’s biggest economy, could legalize recreational marijuana use within five years.

On a state level, the U.S. is already well on its way; 10 states and Washington, D.C. have legalized marijuana for adult recreational use and 33 states have legalized medical marijuana.

With marijuana legal in some U.S. states but not federally, it makes for some confusing times.

For example, pot is legal in Washington state, Michigan, Alaska, and in Canada. But Canadians crossing the border into Washington, Michigan, or Alaska can be barred from the U.S. for life if they admit to having smoked marijuana. That’s because borders are federally operated.

Even if a Canadian crossing into the U.S. admits to owning marijuana stocks that trade on the Nasdaq, they can be barred for life. If you’re an American heading into Canada, you can admit you smoke weed all you like.

Clearer U.S. marijuana laws aren’t coming any time soon either. Former Attorney General Jeff Sessions was not in favor of legalizing marijuana.

And while President Donald Trump has suggested he backs states’ rights to decide their own marijuana fate, he has never said recreational marijuana usage would become legal on a federal level.

Jeff Sessions may be gone but there is no indication that the next permanent attorney general will usher in drastic changes with regards to legalizing marijuana.

U.S. States Legalizing Marijuana

A growing number of U.S. states have legalized marijuana either recreationally or medicinally.

  • Alaska made recreational pot use legal in early 2015. The first dispensary opened for business in late 2016.
  • California was the first state to legalize medicinal marijuana in 1996 and legalized adult recreational marijuana use in 2016.
  • Colorado and Washington became the first two states to legalize recreational marijuana use in 2012.
  • Maine legalized medicinal marijuana in 1999 and adult recreational use in 2016.
  • Massachusetts gave the green light to light up in 2016.
  • Michigan legalized medical marijuana in 2008 and became the first state in the Midwest to legalize recreational use in 2018.
  • Nevada gave the OK to recreational marijuana use in 2017 but you have to live 25 miles away from the nearest dispensary to be allowed to grow your own.
  • Oregon has allowed its residents to smoke weed recreationally since 2015.
  • Utah and Missouri both voted to legalize medical marijuana in 2018.
  • Vermont legalized medical marijuana in 2004 and recreational marijuana use in 2018.
  • Washington, D.C. is home to stressed-out members of Congress who have been able to enjoy recreational marijuana since 2015.

Rhode Island is thinking of legalizing recreational marijuana use, Connecticut’s new governor has said legalizing marijuana is a top priority, North Carolina will be looking at legalizing marijuana in 2019, and in New England, recreational marijuana use has been decriminalized. (Source: “States Where Marijuana is Legal,” Business Insider, November 7, 2018.)

Is the Marijuana Market in a Bubble?

Are marijuana stocks in a bubble? That clearly depends on who you ask. Articles abound about how marijuana stocks are most definitely in a bubble, while others suggest the marijuana boom has not created a bubble.

Admittedly, pot stocks went ballistic in the run-up to the legalization of recreational marijuana use in Canada on October 17, 2018. Since then, pot stocks have cooled a little. It is because investors have tired of marijuana stocks?

Nope.

The so-called marijuana bubble “burst” at the same time that the broader stock market experienced a correction. While marijuana stocks gave up some ground, so did the rest of the market; it may be more than a little premature to say the entire marijuana sector is in a bubble.

Marijuana Market Cap: Are Marijuana Sales Growing?

Some marijuana stocks had sky-high valuations that simply couldn’t be sustained. As a result, some marijuana stocks have fared better than others since the mid-October market-wide sell-off.

That doesn’t mean marijuana sales aren’t growing. They are. It’s just that most investors do not believe the revenue growth justifies the lofty valuations.

Case in point: Tilray Inc (NASDAQ:TLRY) has a market cap of around $10.0 billion and reported third-quarter revenue of $10.0 million. Revenue was up 85%, but not enough to help the company’s share price rebound to its pre-correction levels. (Source: “Tilray, Inc. Reports Third Quarter 2018 Earnings,” Tilray Inc, November 13, 2018.)

Trading at around $100.00, Tilray’s share price is down 52.5% over its September 19 high of $300.00 per share.

Then there’s Cronos Group (NASDAQ:CRON). The Cronos stock price tumbled like all of the other major marijuana players, but it has rebounded nicely.

That’s mostly because it is less expensive than its peers. It also doesn’t hurt that Altria Group Inc (NYSE:MO), the cigarette giant behind Philip Morris USA, is in talks to acquire Cronos.

Cronos Group has a market cap of around $2.5 billion and announced that third-quarter revenue increased 186% year-over-year to $3.8 million. (Source: “CRONOS GROUP INC. ANNOUNCES THIRD QUARTER 2018 RESULTS,” Cronos Group Inc, November 13, 2018.)

Keep in mind, recreational marijuana use in Canada didn’t become legal until the third quarter. This will be the last time Cronos reports marijuana sales that do not include recreational pot sales.

Trading at $10.87, Cronos is only down 28.9% from its September 19 high of $15.30.

For brands like Cronos, Tilray, Canopy Growth Corp (NYSE:CGC), and Aurora Cannabis Inc (NYSE:ACB) to justify their market caps and share prices, they’ll need to report pretty strong gains in the fourth quarter—revenue growth of 100% won’t cut it.

Risks of Marijuana Investing

There are plenty of risks in marijuana investing, just like there are when investing in any other sector. You need to research the company and industry in general. This won’t remove the risk, but it will certainly reduce it.

Taking responsibility for your own investing also has the added benefit of helping increase the reward payoff.

Obviously, marijuana bulls are banking on Canada being the gateway country to broader legalization of recreational marijuana.

Canada, which has a population of 36 million (less than that of California), is projected to have weed sales of $6.5 billion by 2020. (Source: “Canada’s appetite for legal cannabis could be almost as big as it is for wine, CIBC says,” CBC, May 9, 2018.)

By the same year, U.S. marijuana sales are expected to hit $16.0 billion. That’s only a 146% lead over Canadian sales, and the U.S. has 10 times the population. Then again, marijuana is not expected to be legal on a federal level. (Source: “Marijuana Sales Totaled $6.7 Billion In 2016,” Forbes, January 3, 2017.)

Germany is the largest economy in Europe, with a population that is twice that of Canada’s. If it legalizes recreational marijuana, it will become the largest pot market in the world. Australia, Italy, and other countries and continents will eventually follow suit.

Marijuana bulls are also pinning their hopes on major investments from other companies, including cigarette and beverage makers.

The market for cannabis-infused beverages could hit $600.0 million by 2022. Constellation Brands, Inc. (NYSE:STZ) said it was investing an extra $4.0 billion in Canopy Growth and The Coca-Cola Co (NYSE:KO) was allegedly eyeing a deal at one point.

Marijuana investors are betting that there’s more to marijuana than just smoking it. And companies like Constellation Brands help give the marijuana sector more validity and long-term potential.

It’s tough to be a diehard marijuana bear. You may not like investing in pot, but the market isn’t going anywhere. If anything, marijuana is gaining greater acceptance around the world and is being used by an increasingly large number of industries.

When it comes to the broader marijuana sector, pot bears are missing the mark. Like any industry, marijuana stocks will rise and fall, come and go, and bears will profit off the decline of individual stocks.

Marijuana Stock Forecast

Betting against the entire cannabis industry is a mistake. Recreational marijuana only became legal in Canada, a tiny market, at the start of the fourth quarter. Not one single marijuana company has reported financial results that include an entire quarter of recreational marijuana sales.

Chances are good that the industry will experience some hiccups along the way. Marijuana bears will say they told you so. But they won’t be saying that by the end of 2019, when the sector likely has most of the kinks worked out.

Marijuana Stocks for Long Term or Short Term

There are a large number of great marijuana stocks for short- and long-term investors. Below are just some of the better marijuana stocks out there.

Company Ticker
Aurora Cannabis Inc NYSE:ACB
Cronos Group Inc NASDAQ:CRON
Canopy Growth Corp NYSE:CGC
Tilray Inc NASDAQ:TLRY
Hexo Corp OTCMKTS:HYYDF, TSE:HEXO
Green Organic Dutchman Holdings Ltd OTCMKTS:TGODF, TSE:TGOD
Origin House (formerly CannaRoyalty Corp) OTCMKTS:ORHOF, CNSX:OH
CV Sciences Inc OTCMKTS:CVSI
Innovative Industrial Properties Inc NYSE:IIPR
General Cannabis Corp OTCMKTS:CANN
Marimed Inc OTCMKTS:MRMD
Liberty Health Sciences Inc OTCMKTS:LHSIF, CNSX:LHS
MPX Bioceutical Corp OTCMKTS:MPXEF, CNSX:MPX
Neptune Wellness Solutions Inc NASDAQ:NEPT
Namaste Technologies Inc OTCMKTS:NXTTF, CVE:N
OrganiGram Holdings Inc OTCMKTS:OGRMF, CVE:OGI
Charlotte’s Web Holdings Inc OTCMKTS:CWBHF, CNSX:CWEB
The Supreme Cannabis Co Inc OTCMKTS:SPRWF, CVE:FIRE

Analyst Take

The outlook for those looking at investing in marijuana stocks long-term remains bullish at every level.

There isn’t a single (legitimate) study or report showing that marijuana sales are going to slide. It’s the opposite; the biggest marijuana companies are preparing for the global adoption of something that is a given. This includes expanding operations, growing new strains, expanding internationally, and signing partnerships, agreements, and acquisitions, etc.

This doesn’t mean investors don’t need to be cautious. You just need to do your research and separate the best weed stocks from the chaff.

The marijuana sector will continue to bounce around for the foreseeable future, which can make it difficult to predict the short-term direction. But for those with a long investing horizon, marijuana stocks will likely blaze brightly.

In the U.S alone, between 2017 and 2025, the legal marijuana market size is expected to grow at a compound annual growth rate (CAGR) of 24.9%. By 2025, the global legal marijuana market is expected to be worth $146.4 billion, with a CAGR of 34.6%. (Source: Grand View Research, op cit.)

Who would intentionally want to miss out on that?