Marijuana stocks are hogging the spotlight, with many investors asking if they should invest in marijuana stocks and, if so, how to invest in marijuana stocks.
And for good reason. Canada legalized the adult use of recreational pot on October 17, the first industrialized country to do so. Countries like Germany, Australia, and Italy are heading in the same direction.
Here in the U.S., recreational marijuana use is legal in 10 states and Washington, D.C. Medical marijuana use is legal in 33 states. And those numbers are growing.
Recreational marijuana use in the U.S. is still illegal on the federal level, but states that have legalized it are rolling in money. The U.S. marijuana market is projected to hit $22.0 billion by 2022.
From 2017 to 2025, the legal marijuana market size in the U.S. is projected to grow at a compound annual growth rate (CAGR) of 24.9%. Globally, the legal marijuana market is projected to be worth $146.4 billion, with a CAGR of 34.6%. (Source: “Legal Marijuana Market Worth $146.4 Billion by 2025 | CAGR: 34.6%,” Grand View Research, last accessed December 7, 2018.)
With numbers like that, it’s no wonder that investors are rushing into the marijuana industry.
How to Invest in Marijuana Stocks
The marijuana industry may be the hottest play on Wall Street, but those who have been watching weed stocks closely know that it can be a roller-coaster ride.
Early investors in marijuana stocks, depending on if and when they sold, made a lot of money. Those who joined the party recently have not been quite so fortunate.
In the second half of 2017, the Horizons Marijuana Life Sciences Index ETF (OTCMKTS:HMLSF, TSE:HMMJ) soared 121% and closed out the year trading at $18.23. Things haven’t been so rosy in 2018; over the first 11 months of the year, HMLSF’s share price tumbled more than 20%.
On an individual basis, marijuana stocks have provided stellar returns and, more recently, losses. That said, some of the bigger marijuana plays continue to perform well and there are a number of smaller marijuana stocks that show a lot of promise.
To find these stocks though, you need to separate the marijuana stocks that are expected to grow like weeds from the chaff. It’s not as easy as it sounds.
The marijuana industry remains hot, but it is full of risk, just like any other sector. That is why investors need to approach investing in weed stocks like they would any other stock.
Below is the best approach for investors looking to invest in marijuana stocks.
Step-by-Step Guide to Marijuana Investing
Here are four steps that investors should take when investing in marijuana stocks.
1. Research the Company
When it comes to marijuana stocks, definitely research the company. Since it’s your money, it’s better to take responsibility for your own research as opposed to depending on the talking heads on TV or friends who may not understand the market.
There are two approaches you can take when researching a marijuana company: fundamental and technical.
Investors who use fundamental analysis look at the company’s fundamentals—i.e. financial information like quarterly results, balance sheets, and income statements—to predict a trend.
Investors who approach marijuana stocks from a technical angle believe that stock price chart patterns and past price performance can help predict what the future prices will be.
2. Decide How Much You Want to Invest
Savvy investors know that the stock market is not like gambling, no matter what your non-investing friends say. Having said that, whether it’s Wall Street or the Vegas Strip, never part with more money than you can afford to lose.
Many good investors have been left on the sidelines because they invested more than they should have and, in some cases, were leveraged beyond belief.
Stocks in general are volatile. Startup industries like marijuana are much more susceptible to growing pains. As a result, it can be difficult to pick the winners when an industry is young.
For proof, just look back to the excitement around the then-burgeoning dotcom and tech industry in the late 1990s.
3. Identify Your Investing Timeline
How long is your investing timeline? Is your investing horizon years down the road or are you more of a day trader? Each timeline has a different risk threshold, which will have an impact on when you should buy and sell.
If you’re a long-term investor, short-term fluctuations won’t matter. If you’re a short-term trader, determine the most you’re willing to lose and what profits you’re content with.
4. Buy Low, Sell High
Yes, buying low and selling high is the goal. To get there though, you need to know the basics on how to buy and sell marijuana stocks.
There are two types of “buy” orders: limit order and market order. Knowing the difference could save you a lot of money. A market order acquires a stock at the current market price.
With a limit order, you buy a stock when the price falls to (or below) the limit price you have set. Because you have set a limit price, there is no guarantee that you will be able to acquire the equity you have set your sights on.
Most marijuana stocks trade on the Toronto Stock Exchange (TSE), the Toronto Venture Exchange (TSX-V), or the Canadian Securities Exchange (CSE).
That’s because medical marijuana has been legal in Canada since 2001. As a result, Canadian marijuana companies have had almost 20 years to build their infrastructures, revenue streams, and develop partnerships, etc.
Many of these Canadian-listed companies also trade in the U.S., but on the over-the-counter markets (OTCMKTS). Investors tend to shun OTCMKTS stocks because the companies that list there do not face the same kind of scrutiny that equities listed on the New York Stock Exchange (NYSE) or Nasdaq do.
Having said that, those same marijuana stocks that trade in Canada on the TSE and CSE are heavily scrutinized. So there’s no reason to ignore OTCMKTS that are also trading on Canadian exchanges. You can find lots of information on the company’s financials on the corporate web sites and the TSE and CSE web sites.
The vast majority of Canadian and American marijuana companies trade on Canadian stock exchanges because recreational weed is legal there. Marijuana is illegal in the U.S. on a federal level. As a result, it is very difficult for marijuana companies to get listed on senior exchanges like the NYSE or Nasdaq.
Weed companies like Tilray Inc (NASDAQ:TLRY), Canopy Growth Corp (NYSE:CGC), Aurora Cannabis Inc (NYSE:ACB), and Cronos Group Inc (NASDAQ:CRON) have all benefited from their listings in the United States.
And more and more Canadian-listed marijuana companies have plans for being listed on the Nasdaq and NYSE.
Because recreational marijuana is still illegal federally in the U.S., there are legal risks to investing in marijuana stocks. Again, 33 states have legalized medical marijuana, and 10 states and Washington, D.C. have given the green light to recreational marijuana.
Technically, the federal government could step in and shut those operations down. But President Donald Trump has said he backs states’ rights to make up their own minds when it comes to marijuana. On the other hand, Trump has never said he wants to legalize recreational marijuana at the federal level.
Also Read: List of U.S. States Where Marijuana Is Legal
Moreover, because marijuana is illegal in the U.S., it can be difficult for American marijuana companies to raise capital or open bank accounts. That’s because U.S. federal laws make it difficult for banks and other financial institutions to lend to marijuana-related companies.
Until the U.S. legalizes marijuana at the federal level, there will always be legal risks associated with marijuana companies.
Should You Consider Marijuana Stocks for the Short Term or Long Term?
What kind of marijuana investor are you? Are you in it for the long haul or are you more of a day trader or swing trader?
Long-Term Marijuana Investment
Buy-and-hold traders take a long-term perspective to marijuana investing. If you’re a long-term trader, you don’t get anxious about short-term (daily, weekly, monthly) fluctuations. You’re more focused on long-term capital appreciation (what the marijuana stock looks like in five years, 10 years, 15 years, or longer).
If you’re a long-term marijuana investor, you adhere to a fundamental approach to research. Chances are, most of your marijuana stock portfolio will be made up of major marijuana players or even marijuana-related exchange-traded funds (ETFs) like the Horizons Marijuana Life Sciences Index ETF or the ETFMG Alternative Harvest ETF (NYSEARCA:MJ).
Researching those ETFs will also show you what marijuana stocks they deem worthy enough to be in their portfolios.
Short-Term Marijuana Investment
Day trading marijuana stocks is not for the faint of heart. By their very definition, short-term marijuana traders are afraid of commitment. As a short-term marijuana investor, you may buy a stock and trade it one, two, 20, or even 30+ times each day or every few days.
Instead of focusing on long-term appreciation, short-term marijuana investors take advantage of short-term price fluctuations.
If you’re a short-term marijuana investor, you are also a technical trader. You may not even care what the company you are investing does; your focus is on chart patterns, volume, stock price performance, and daily news.
Choosing Marijuana Stocks: Different Ways to Invest in Marijuana Stocks
There’s more than one way to invest in marijuana. Investing in marijuana growers and retailers is the most obvious way, but there are numerous other companies that operate under the marijuana umbrella.
Recreational Marijuana Stocks
Recreational marijuana stocks include companies like Canopy Growth, Aurora Cannabis, and Cronos. They are the companies that grow, harvest, and distribute marijuana to customers.
Medical Marijuana Stocks
Most marijuana stocks started out selling medical marijuana, simply because that was what was legal at the time. Since recreational marijuana became legal in Canada on October 17, 2018, most medical marijuana stocks have also branched out into the lucrative world of recreational pot sales.
In addition to the big marijuana players, other marijuana stocks operating in the medical marijuana field include CannTrust Holdings Inc (OTCMKTS:CNTTF, TSE:TRST), Hexo Corp (OTCMKTS:HYYDF, TSE:HEXO), OrganiGram Holdings Inc (OTCMKTS:OGRMF, CVE:OGI), and GW Pharmaceuticals PLC (NASDAQ:GWPH).
Marijuana Services Stocks
There are many companies out there that service or support marijuana producers on various levels, with hydroponics, financing, setting up, or e-commerce.
Some of the more well-known marijuana services stocks include Scotts Miracle-Gro Co (NYSE:SMG), Marimed Inc (OTCMKTS:MRMD), and Namaste Technologies Inc (OTCMKTS:NXTTF, CVE:N).
When to Buy Marijuana Stocks
Despite the thrill of it all, most investors should take a long-term view of marijuana stocks. While this generally means not necessarily caring about short-term price fluctuations, the recent roller-coaster ride that the entire marijuana sector has been on shows that when you initially buy a marijuana stock is just as important as when you sell.
In the summer of 2018, virtually every marijuana stock was on fire. Since October, they have been in a fire sale.
Fortunately, it’s not too late to get into marijuana stocks. That said, it’s important to monitor any marijuana stocks or ETFs you buy. If you’re risk-averse, it’s important in these heady days to pay close attention to industry news.
When to Sell Marijuana Stocks
It’s impossible to time the market, especially in emerging sectors like marijuana.
For the most part, because the weed industry is in its infancy, it’s best suited for experienced investors or those who thrive on risk.
Green investors aren’t generally as patient as seasoned investors, and they can get sucked in or spooked easily by the corporate press. This can result in buying and selling at the wrong time.
When it comes to marijuana stocks, whether they’re the big players or more speculative in nature, you have to figure out your risk/reward threshold.
You also have to ignore the noise on the street. That’s why it’s imperative that you do your own research, keep track of the stock (even if you’re in it for the long haul), and monitor the industry.
U.S. vs. Canadian Marijuana Stocks
Canada is the land of legal pot and marijuana stocks, but the U.S. is where the potential is.
Canada has a population of just 36 million, less than that of California. In 2017, Canadians purchased $4.6 billion worth of marijuana. Keep in mind, this was before recreational weed became legal. By 2020, marijuana sales in Canada are projected to hit $6.5 billion. (Source: “Canada’s appetite for legal cannabis could be almost as big as it is for wine, CIBC says,” CBC, May 9, 2018.)
Compare that to California, which only began to legally sell recreational cannabis on January 1, 2018. For the year, California’s marijuana sales have been projected to reach $7.0 billion.
Canadian marijuana stocks are focused on Canada and international expansion—mostly in regions that are pot-friendly, including Europe, Central America, South America, and Australia.
Some Canadian marijuana companies are preparing for the eventuality of weed becoming legal in the U.S., but because of federal regulations, they are not as aggressive as they are with other international markets.
There are only a few American-based marijuana companies operating in the U.S. right now. They may be small compared to their Canadian counterparts, but with more states legalizing recreational and medicinal marijuana, the potential for massive profits is huge.
Some interesting U.S. marijuana stocks are MariMed, Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), Argitek Holdings Inc (OTCMKTS:AGTK), American Cannabis Company Inc (OTCMKTS:AMMJ), Americann Inc (OTCMKTS:ACAN), KushCo Holdings Inc (OTCMKTS:KSHB), and Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE).
Are Marijuana Stocks a Low-Risk Investment?
I’ve yet to meet a low-risk investment. Even well-established, low-risk investments like Enron Corporation, Nortel Networks Corporation, and WorldCom seemed to catch well-informed investors off guard. Investing becomes even riskier when dealing with emerging industries like marijuana.
But investing in marijuana stocks doesn’t need to be risky. The sector may be finding its feet, but the fact is, the marijuana industry isn’t going anywhere. It’s gaining traction and the long-term outlook remains exceptionally bullish.
Recreational and medicinal marijuana is a multi-billion-dollar industry that is in its early stages. This is one of those rare times when investors can still get in on the ground floor. But they have to exercise caution.
Investors who aren’t afraid to conduct some serious due diligence can lower their overall risk and could realize amazing short- and long-term gains.
One big reason for the broad-based optimism is Wall Street’s acceptance of legal marijuana.
There are pure-play marijuana stocks out there attracting attention, and those companies are inking strategic partnerships that were initially thought to be outside of the marijuana smokehouse.
Constellation Brands, Inc. (NYSE:STZ) invested in Canopy Growth, Molson Coors Brewing Co (NYSE:TAP) is developing non-alcoholic cannabis-infused drinks with Hexo, and The Coca-Cola Co (NYSE:KO) is said to be eyeing a potential cannabis company partnership.
These partnerships are not going to set the world ablaze, but they show that the legal marijuana industry is far more lucrative than investors could have imagined.
Vivien Azer, the only marijuana analyst from a major Wall Street research house, recently predicted that the cannabis market could eventually be worth $500.0 billion. (Source: “No. 1 Wall Street pot analyst says the marijuana market will be much bigger than she first thought,” MSNBC, October 10, 2018.)
Before the legal marijuana industry gets anywhere near that kind of valuation, it will experience numerous periods of volatility. That shouldn’t be a surprise to any investor though. Every new industry faces growing pains, even the budding marijuana market.