10 Questions You Need to Ask Before Investing in Marijuana Stocks

Marijuana Stocks
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Marijuana 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. Legalization 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 with plenty of room to grow; estimates peg the potential size of marijuana sales at $50.0 billion per year by 2026. (Source: “Marijuana industry could be worth $50 billion annually by 2026,” MarketWatch, April 22, 2017.)

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This opportunity is clear as day, but many analysts are constrained by politics. While that mood is changing, there’s still a long way to go before total marijuana legalization becomes politically feasible in many countries across the world.

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.

In fact, there is arguably more volatility in marijuana stocks due to the age of the industry. This means that wild swings are more likely—it helps spur growth but can also increase risk.

And then there’s a lot of “political risk” surrounding the industry.

While the new Farm Bill 2018 legalized hemp and may lead to cannabidiol (CBD) legalization in the near future, the federal government in the U.S. still needs to grapple with these questions.

Cannabis is, after all, still a Schedule 1 drug under the Controlled Substances Act in 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 Drug Enforcement Administration (DEA) shut them down? Actually, no.

After several states legalized recreational weed, the Department of Justice (DoJ) 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.

That risk was heavily mitigated by the replacement of Jeff Sessions, a known drug crusader, as Attorney General. On the federal level, it looks like things will be returning to the status quo…for now.

But the future is leaning toward legalization; over 30 states have legalized medicinal marijuana and 10 states in addition to Washington D.C. have legalized pot for recreational use.

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 skydiving for years, then one more jump feels pretty safe. It’s just one out of a hundred, 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 (OTC) markets. There is a growing presence of marijuana stocks on the Nasdaq and New York Stock Exchange (NYSE), but many are still OTC and available on Canadian exchanges.

More specifically, there are different corners of the weed market.

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

Medical marijuana stocks

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.

Marijuana producer stocks

Marijuana producer 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.

Marijuana services stocks

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 do business with weed dealers, these services stocks were able to carve out a niche.

For more information on these types of 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 is 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 has traditionally preferred that states govern themselves as much as possible, so that local values overrule the bureaucrats in Washington D.C. 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 now that marijuana has seen full-scale legalization in the country. Additionally, investing in Canadian marijuana stocks helps hedge against U.S. political risk.

Germany has also begun to show promise as marijuana companies are flocking to one of the largest markets in the world, hoping to set up foundations as medical marijuana expands—and potentially recreational pot, too.

8. Is It Too Early to Invest?

The marijuana industry is in what I would term the adolescent phase of its growth.

While the extreme surges of the sector’s very early days are likely gone for the next little while, we can still expect to see 100% or even 200% growth as the industry continues to expand.

In fact, this is the safest the industry has ever been.

While gains may not reach 500% again, there’s a good chance that marijuana stocks will double or triple in value when countries like the U.S. legalize pot. In the meantime, much of the danger that was present earlier in the market has since disappeared.

9. What Are the Biggest Marijuana Stocks?

Here are five of the biggest pot stocks by valuation, as of December 2018:

Company Stock Ticker Market Cap (Billions)
Canopy Growth Corp CGC $11.0
Tilray Inc TLRY $7.2
Aurora Cannabis Inc ACB $6.1
Cronos Group Inc CRON $2.1
Aphria Inc APHA $1.5

However, any of these stocks could double or even triple at any time, so 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.