This has been an extremely special year for marijuana stocks, which was highlighted by the legalization of recreational weed in Canada. The passage of the Cannabis Act was a long time coming, and it paves the way for what should be billions of dollars in added annual sales by the beginning of the next decade. Even more so, it brought legitimacy to an industry that was taboo to discuss even a few years ago.

Plenty of advancement was seen in the United States, too. During midterm elections, residents of Utah and Missouri voted to legalize medical cannabis, bringing the number of medical weed states up to 32. Vermont and Michigan also gave the green light to recreational cannabis during the year, increasing the number of adult-use legal states to 10.

A rolled cannabis joint lying atop a cannabis leaf on a table.

Image source: Getty Images.

As marijuana gains validity throughout North America, investors have been more than willing to give pot stocks a chance. Though predominantly an industry favored by retail investors, surprises sometimes do occur.

Surprise, these Californians own pot stocks!

Recently, the California Public Employees' Retirement System, better known as CalPERS, filed paperwork with the Securities and Exchange Commission that detailed the holdings of its pension fund, which stands at more than $350 billion in assets under management. This is a pension fund that, as of the fiscal 2016-2017 year per the CalPERS website, had 1.93 million members, including over 600,000 state members, nearly 600,000 public agency members, and over 700,000 school members. 

It's also a fund that owns marijuana stocks, whether these 1.93 million public employee retirees realize it or not. Despite putting a moratorium on tobacco stock purchases since 2000, CalPERS has had no issue adding direct and ancillary marijuana players to its gigantic pension fund portfolio.

A green highway sign that reads, Welcome to California, with a cannabis leaf.

Image source: Getty Images.

CalPERS goes shopping

In the latest quarter, CalPERS scooped up 1,617 shares of Tilray (NASDAQ:TLRY) -- yes, the same company that catapulted from a list price of $17 per share to as much as $300 within two months following its initial public offering -- and 75,500 shares of embattled drugmaker Insys Therapeutics (NASDAQ:INSY)

Why Tilray? Well, the company does have well-recognized medical marijuana brands, and it appears set for rapid domestic and international expansion following its initial public offering. The company raised $153 million in gross proceeds, giving it plenty of capital to perhaps double or triple the roughly 850,000 square feet of growing capacity it expects to have by year end, according to Tilray's S-1 prospectus filing with the SEC in June.

The investment in Insys Therapeutics is a lot more suspect. Insys recently settled with U.S. regulators after allegations of wrongdoing surrounding lead drug Subsys, a fentanyl-based medicine. Sales of Subsys have since fallen off a cliff, pushing Insys deeply into the red. Making matters worse, Insys' oral dronabinol solution -- a synthetic version of tetrahydrocannabinol (THC), the psychoactive cannabinoid responsible for getting a user high -- Syndros has flopped since its launch. Once envisioned as a greater than $200 million a year drug, Syndros may not even reach $4 million in full-year sales in 2018.

A female lab researcher examining a flask full of cannabinoid-rich liquid.

Image source: GW Pharmaceuticals.

But wait -- there's more

In addition to CalPERS opening two new positions in pot stocks during the quarter, the largest U.S. pension fund came into the quarter having already owned two companies involved in the cannabis movement.

First, CalPERS' giant pension fund owns 37,100 shares of cannabinoid drugmaker GW Pharmaceuticals (NASDAQ:GWPH). In June, GW Pharmaceuticals became the first drugmaker to gain approval for a cannabis-derived therapy from the U.S. Food and Drug Administration. GW Pharma's lead drug, Epidiolex, dazzled in multiple late-stage trials by reducing seizure frequency for patients with two types of rare childhood-onset epilepsy. With Epidiolex launching last month, expect GW Pharmaceuticals' sales to really begin ramping up over the next couple of quarters.

The fund also owns shares of Constellation Brands (NYSE:STZ), the maker of Corona and Modelo beer, along with a host of other spirits. Constellation Brands announced a $4 billion equity investment into Canopy Growth, the largest publicly traded pot stock by market cap, in August. Constellation's equity stake in Canopy was 37% upon closing -- it was actually the third such investment in Canopy since October 2017 -- but it could be increased to as much as 56% if the 139.7 million warrants it also received are exercised.

All told, CalPERS had $134 million in exposure to the marijuana industry at the end of the third quarter, although $126.6 million of that is tied to Constellation Brands, which will generate most of its sales and profit from outside the cannabis industry.

A dollar sign shadow being cast atop a pile of cannabis leaves.

Image source: Getty Images.

There's reward... and risk, too

To the more than 1.9 million members of CalPERS, you should know that there is enormous growth potential within the marijuana market. North American weed sales totaled $9.7 billion in 2017, but are on pace to hit $47 billon by 2027, according to cannabis research firm ArcView. If the U.S. federal government were to change its tune on weed, it would open the door to the largest market in the world for pot demand. There's certainly an opportunity for these investments to pay off over the long run.

However, there's also substantial risk to owning marijuana stocks. These are publicly traded companies that have been shot into the stratosphere by emotionally driven investors with the expectation that sales would explode higher right out of the gate. That may not happen. Canada is contending with supply shortages in more than half of its provinces, which could wind up driving consumers back to the black market.

To add, marijuana growers are going to be spending liberally while they finish their capacity expansion projects, roll out new adult-use brands, market these brands, and potentially acquire complementary companies. In other words, profitability could be further away than most folks realize.

It'll certainly be interesting to see how CalPERS' stake in pot stocks evolves in the quarters and years to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.