Did you know that according to Fortune Business Insights, the global cannabis industry could be worth nearly $200 billion by 2028? Analysts expect the industry to grow at a compound annual rate of 32% until then. If you're a long-term investor who can afford to take on some risk, that's one industry you should keep on your radar.
There are multiple ways you can gain exposure to cannabis. Below, I'll highlight three different options for you, depending on your risk level.
1. Investing in cannabis producers
The riskiest strategy, but also the one that may involve the biggest payoff, is to invest in cannabis producers. Tilray Brands (TLRY) is among the top stocks in the industry today, and the Canadian-based company is aiming to generate $4 billion in annual revenue in 2024. It's a high-risk, high-reward plan that is banking on legalization in Europe and the U.S.
If successful, the company's revenue would be more than six times what it is now. If it fails, however, the crashing pot stock could fall even lower. In just the past year, its shares are down more than 72%.
Cannabis producers are risky because they are often unprofitable in the true accounting sense, normally reporting profitability in terms of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). There have also been issues of excess supply lately that have led to limited quarter-over-quarter growth. Plus, it's not uncommon to see wild changes in fair value on a cannabis company's income statement that can lead to significant swings in earnings from one period to the next.
This may be the most common investing strategy for cannabis, but it's not suitable for risk-averse investors.
2. Using pick-and-shovel stocks
A bit of a safer option for investors is focusing on pick-and-shovel plays that help the industry in its growth, but that aren't directly involved with growing marijuana. One example here is GrowGeneration Corp (GRWG -1.40%), which operates organic gardening stores and provides producers with equipment that they need for growing marijuana. This includes grow lights, tents, nutrients, and other products.
Although it isn't a producer itself, GrowGeneration is still largely dependent on producers doing well and strong demand in the industry. It's a better bet to post a profit, but it too has struggled of late due to an excess supply in the industry. GrowGeneration has reported losses for three straight quarters, and its shares have cratered 84% in just 12 months.
Pick-and-shovel plays can be a bit less risky than cannabis producers in the sense that they are more likely to be profitable. However, as GrowGeneration's stock decline has illustrated, they too can be risky investments to own when the industry is struggling.
3. Owning companies that have invested in cannabis
The safest option is undoubtedly to invest in a company that just invests in the cannabis industry. A good example here is tobacco giant Altria. It invested $1.8 billion in cannabis producer Cronos Group in 2018 for a 45% stake in the business. It's a modest amount given that Atria generates about $20 billion in revenue every year.
However, it still gives Altria a position in the industry, and should legalization take place, it has a cannabis company that it can invest into to help it take advantage of any growth opportunities that come up.
Investing indirectly in the cannabis industry through Altria is the least risky option for gaining exposure to the hot marijuana market. However, because the investment may amount to just a small part of the overall business (as is the case with Altria), it may benefit the least from any catalysts that help give the cannabis industry a boost.
