The cannabis industry is still in its early growth phase. As more states and countries legalize medical and recreational marijuana, opportunities continue to expand for growers, retailers, biotech firms, and ancillary businesses.
One of the biggest potential catalysts is the U.S. Drug Enforcement Administration’s move to reclassify marijuana from Schedule I to Schedule III. If finalized, this could:
- Allow cannabis companies to deduct normal business expenses (ending IRS 280E burdens)
- Improve access to banking services
- Encourage broader institutional investment
Still, cannabis remains federally illegal in the U.S., and regulatory uncertainty creates real risks for investors.
Before investing, it’s important to understand how the industry works and how to evaluate cannabis stocks.
Top marijuana stocks to consider
1. Green Thumb Industries
OTC: GTBIF
Key Data Points
2. Trulieve Cannabis
3. Innovative Industrial Properties
NYSE: IIPR
Key Data Points
U.S. cannabis companies can't easily secure capital from banks or financial institutions since marijuana remains illegal at the federal level. Innovative Industrial Properties (IIP) (IIPR -2.99%) helps solve the cash shortage for growing marijuana companies. It buys properties owned by U.S. medical cannabis operators and leases the properties back to them. The sale to IIP provides the cannabis operator with much-needed cash, and the lease agreements create a steady revenue stream for IIP.
Innovative Industrial Properties has grown significantly in recent years and now owns more than 100 properties in 19 states. The company continues to generate solid revenue and earnings powered by its sale-leaseback business model, even with some of its tenants facing financial challenges. Because IIP is organized as a real estate investment trust (REIT), it returns at least 90% of its taxable income to shareholders.
In some ways, IIP wouldn't benefit as much from federal cannabis reform as other companies. Its shares already trade on the New York Stock Exchange (NYSE). If traditional banking services were available to U.S. cannabis operators, IIP could face increased competition. However, federal reforms would likely cause the U.S. cannabis market to expand -- which should work in IIP's favor.
4. Quest Diagnostics
NYSE: DGX
Key Data Points
Quest Diagnostics (DGX +1.36%) might be a surprising pick to include in a list of marijuana stocks. It's one of the world's largest providers of laboratory testing services.
How does Quest tie in with the cannabis industry? The widespread legalization of marijuana in states across the U.S. is driving increasing demand for drug testing in the workplace. Quest offers drug testing services and is certified by the U.S. Department of Health and Human Services for federally mandated drug testing of workers in some safety-sensitive fields.
Quest could be an attractive stock for more risk-averse investors who want to profit from the legalization of cannabis. It has a long track record of success and is consistently profitable.
5. Turning Point Brands
How to invest in marijuana stocks
These five steps will tell you what you need to know to become a cannabis investor.
1. Understand the various types of marijuana products
There are two broad categories of cannabis products:
- Medical marijuana: This is cannabis used for medicinal purposes, and it is legal in 39 U.S. states, the District of Columbia, three U.S. territories, and more than 40 countries. A prescription from an authorized healthcare provider is typically required for patients to obtain medical marijuana.
- Recreational marijuana: Twenty-four U.S. states, plus Washington, D.C., have legalized recreational marijuana for adult use.
2. Know the different types of marijuana companies
The three primary types of companies in the marijuana industry are:
- Cannabis growers and retailers: These companies cultivate cannabis (often in indoor facilities and greenhouses), harvest the crops, and distribute the end products to customers. Some also operate retail stores that sell medical and/or recreational cannabis.
- Cannabis-focused biotechnology companies: Some biotech companies participate in the cannabis industry by extracting cannabinoids from marijuana to develop new pharmaceuticals.
- Ancillary product and service providers: These companies don't touch the plants but support the marijuana industry by providing products and services, such as hydroponic products, lighting systems, packaging materials, and management services.
3. Understand the risks of investing in the marijuana industry
Investing in marijuana stocks is associated with additional specific risks you should clearly understand:
- Legal and political risks: In the U.S., selling marijuana remains illegal at the federal level. U.S. federal law places severe restrictions on banks that deal with marijuana-related businesses. As a result, it's difficult for U.S. cannabis businesses to access critical financial services. Political support for federally legalizing marijuana has increased, but there's no guarantee it will occur.
- Supply and demand imbalances: As a burgeoning industry in the agriculture sector, marijuana is particularly prone to irregularities in supply and demand.
- Over-the-counter (OTC) stock risks: Many cannabis companies trade on over-the-counter (OTC) markets. That means they are not required to regularly file financial statements, which are important for investors wanting to assess a stock's risk.
- Financial constraints: Many cannabis industry participants are unprofitable growing companies that face the prospect of running out of cash. They often raise capital by issuing new shares, which dilutes the value of the existing shares.
4. Know what to look for in a top marijuana stock
When considering any marijuana stock, you should:
- Research the management team.
- Understand the company's growth strategy and competitive position.
- Scrutinize the company's financial statements.
- Examine the number of warrants and convertible securities the company has issued. A high number on a percentage basis could indicate that the stock will be meaningfully diluted in the future, potentially causing the share price to drop substantially.
For marijuana growing companies, specific metrics to research include:
- All-in cost of sales per gram: A company's total per-gram cost of producing cannabis
- Cash cost per gram: A company's total per-gram cost of producing cannabis, excluding the costs associated with amortization, packaging, and inventory adjustments
You can look for and prioritize marijuana growers with lower cost structures since they tend to be the most competitive.
5. Monitor changing marijuana industry dynamics
Marijuana industry investors should closely monitor any marijuana stocks in their portfolios, along with the overall industry itself. Some changes -- such as the U.S. federal government relaxing its marijuana laws -- would be beneficial, while others could be devastating.
The global marijuana industry is likely to experience tremendous growth, but it may not occur evenly or predictably. Following these seven steps for investing in marijuana stocks can help investors navigate this exciting and challenging industry.
Should you buy cannabis stocks?
Just because there's a trendy new sector with lots of press and potential growth doesn't mean you need to invest in it. Conservative investors who prefer lower risk are likely better off avoiding investing in marijuana stocks, or choosing a marijuana ETF instead.
Aggressive investors with high risk tolerances, though, will probably find a lot to like about marijuana stocks. The cannabis industry is still in its early stages. The market opportunities are enormous, especially as more U.S. states legalize cannabis. Investing in these stocks is a high-risk but potentially high-reward proposition.
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FAQ
Investing in Marijuana Stocks FAQ
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