Should You Invest in Marijuana Stocks?
Many investors are hoping to strike it rich by investing in marijuana stocks, but they should think long and hard about that decision. It can be confusing not knowing how to invest in marijuana stocks since there are so many ways to invest in marijuana stocks. Cannabis legalization is an opportunity, to be sure, but it is also a risk. The real question is: Should you invest in marijuana stocks?
It all depends on your ability to handle risk. Even the best marijuana stocks in 2017 have a certain amount of volatility, so it’ll take an iron stomach to profit from cannabis.
If you can stay cool while red is flashing across your trading screen, then keep reading. The trend of marijuana legalization is certainly minting new millionaires across North America. However, it’s important to remember that governments move slower than businesses.
Politicians have to build consensus around an issue, debate its effects, commission studies; basically do anything instead of actual work. Sometimes they flip-flop on issues, other times the opposition party wins an election and reverses course.
These are called “political risks” and they affect many emerging industries, such as marijuana, Bitcoin, and driverless cars. While we’re bullish on these trends, we would be foolish to ignore the obvious political risks. I like to think of it from a venture capital (VC) perspective.
The venture capital model gave birth to companies like Facebook Inc (NASDAQ:FB) and Amazon.com, Inc. (NASDAQ:AMZN). Those investors made tons of money by getting in at the earliest investment stages, but it means they took on a significant amount of risk.
In fact, most venture capitalists bet on 10 stocks knowing that most of them won’t work out.
All they need is for one of those risky stocks to pay off big time. The idea is that those gains would finance the less successful bets, while also making them tons of profit.
Some of the greatest investors in history have used this venture strategy. Look at Marc Andreessen and Peter Thiel. They made a fortune on Facebook stock, but we don’t see the other nine failed investments they made to get there, because they knowingly took on that risk.
When investing in emerging technologies, it’s probably best to think like a VC. You are taking a long position on something “new,” something which lacks a blueprint for success. Obviously, this makes it much harder to run a company like clockwork.
That is the reality of marijuana companies—they may be risky, but the rewards could be worth the risk, if you can handle it.
How to Invest in Marijuana Stocks?
Here’s the first thing you should know: There’s more than one way to profit from marijuana stocks. Not all of them are in the business of selling cannabis to customers. Some are suppliers, others are distributors, and a few are even further afield.
For instance, marijuana producers stocks are completely different from medical marijuana stocks.
Just because the latter category has “marijuana” in the title doesn’t mean they grow and sell weed. They are much more like biotech companies, to be honest, because they use the chemical properties of marijuana to create prescription drugs.
In addition to those two categories, there are also marijuana services stocks. These marijuana companies provide help in matters ranging from custom real estate to social media.
Don’t get me wrong, all the companies have marijuana somewhere in the business model. But putting them in one basket is like saying that all technology companies should be in one basket.
No one (with any sense) thinks that is true. There are hardware companies, software companies, enterprise companies. There are literally hundreds of subcategories.
1. Marijuana Producers Stocks
Marijuana currently slips between the cracks of U.S. law. Some states have legalized its use, but federal law still prohibits the ownership and distribution of cannabis.
Under normal circumstances, the federal government’s decision should overrule the states, but President Obama let them pass. He allowed individual states to ignore the federal policy if they chose to regulate marijuana. That is how the $6.8-billion marijuana industry was born.
The most well-publicized of these companies are marijuana producers stocks.
You probably heard about them before. Remember the surge of dispensaries and grow-ops that launched in Colorado when it legalized recreational marijuana use in January 2014?
Those are marijuana producers, and they’re doing exactly what you think they’re doing—growing and selling marijuana for recreational use.
They are no different than distilleries and breweries. Except that instead of liquor and beer, they sell cannabis-related products.
Within a year, Colorado’s emerging marijuana companies were making $700.0 million in sales. Not only was this good for the local economy, but it also stimulated government tax receipts.
Until the election of Donald Trump, we honestly thought that nothing could stop this trend.
But recent statements by Trump’s attorney general, Jeff Sessions, are worrisome.
He publicly suggested a federal crackdown on marijuana stocks, saying that cannabis is “more dangerous than a lot of people realize” and he is opposed to its legalization.
“Marijuana is against federal law, and that applies in states where they may have repealed their own anti-marijuana laws. So yes, we will enforce law in an appropriate way nationwide,” Sessions said. “It’s not possible for the federal government, of course, to take over everything the local police used to do in a state that’s legalized it. And I’m not in favor of legalization of marijuana. I think it’s a more dangerous drug than a lot of people realize.”
(Source: “best marijuana stocks in 2017,” CNBC, March 14, 2017.)
Remember what I said about “political risk?” Halting a bullish trend is a time-honored tradition among bureaucrats; indeed, it is a rite of passage. But most investors didn’t expect this from a candidate who campaigned on economic growth.
With only eight states legalized (and fairly recently too), marijuana companies are already generating nearly $7.0 billion in sales. Doesn’t that count as economic growth?
In any case, we can sidestep this risk by looking north, to Canada.
America’s wintry upstairs neighbor is well on its way to legalizing pot. Prime Minister Justin Trudeau promised new legislation on the issue by the summertime, which caused a surge in marijuana producers stocks. Canopy Growth Corp (TSE:WEED) is a great example.
Last year, Canopy stock was trading at roughly $2.00. It’s now hovering at $10.88, which means the share price quadrupled in just 12 months!
Chart courtesy of StockCharts.com
The political risk to Canopy Growth is much less than to its peers in the U.S. Despite several raids conducted by Canadian authorities in early March, it appears unlikely that Prime Minister Trudeau will abandon his legalization scheme. The political blowback would be too dangerous.
Producers stocks like Canopy Growth are the best marijuana stocks in 2017. But only if you are measuring by potential upside and can handle the political risk.
2. Medical Marijuana Stocks
For those with a smaller appetite for risk, there are medical marijuana stocks like Cara Therapeutics Inc (NASDAQ:CARA). This company is working to address one of the most pressing problems in the country: the opioid epidemic.
America is hooked on painkillers. It’s not anyone’s fault exactly, but the fact remains that many prescription opioids are addictive. People start taking them as pain medication and it gives them a feeling of euphoria. So they go back for more, again and again.
This problem is particularly serious in Maryland, where Governor Larry Hogan was forced to declare a state of emergency. Cara is using properties harvested from marijuana (cannabinoids) to develop less addictive painkillers.
Rather than distracting patients with a feeling of euphoria, its drug targets the root cause of the pain. I’m no chemist, but that sounds like a much better way of tackling the problem.
It seems the market agrees with me. CARA stock shot through the roof in the last 12 months, advancing its share price by 234%.
Chart courtesy of StockCharts.com
Because marijuana is being used for medical purposes in these cases, governments are more likely to craft loopholes in their favor. It’s much harder to sell the idea of a weed ban if there are patients who rely on it to ease their suffering.
That’s why medical marijuana stocks could be the best marijuana stocks in 2017 for you.
3. Marijuana Services Stocks
Marijuana services stocks are perhaps the least conventional way to invest in the booming marijuana industry. These are companies that lie adjacent to the other two categories.
For example, there are very few realtors that weed producers can approach when looking to expand. Most real estate agents have no idea what they require, because the industry is so new.
The public stigma around marijuana doesn’t help. Most businesses are wary of partnering with marijuana companies. Either their social values clash with the idea, or else they realize the federal ban puts serious limitations on financing options.
In any case, their reluctance creates a market opportunity.
Zoned Properties Inc (OTCMKTS:ZDPY) is one of the firms exploiting this market opportunity.
Its web site describes the firm as a property developer for “emerging industries,” which is basically code for marijuana. The philosophy here is simple: We’ll provide basic services to the booming marijuana industry if no one else will. Money is money, at the end of the day.
There has also been a small crop of social media apps which will connect marijuana users and vendors. Social Life Network Inc (OTCMKTS:WDLF) and MassRoots Inc (OTCMKTS:MSRT) are two examples. MassRoots already has 900,000 users.
Like in the real estate case, ambitious entrepreneurs noticed that search engines and social media apps were unfair to marijuana-related content. They launched competing platforms to level the playing field, and in the process, made themselves pretty rich.
While the road to marijuana legalization looks inevitable, there are political landmines that could cost you a bit of money along the way. Be wary of them, and of your own tolerance for risk.
Remember that there is more than one way to profit from the cannabis revolution: marijuana producers stocks, medical Marijuana stocks, and marijuana services stocks. Understanding the various approaches is important when it comes to knowing how to invest in marijuana stocks.
Only those with an iron stomach for the unexpected, who smile calmly as the world erupts in fire, can do whatever they want. The rest of us have to think about what happens if things go wrong.