Investing in Marijuana Stocks

The marijuana industry is expected to double in value by 2025, and many investors are seeking to profit. As states and entire countries decriminalize or legalize cannabis and/or its components, there are growing opportunities for entrepreneurs and existing companies.

But, as in any nascent industry, there are also plenty of investment risks. Whether you're a first-time investor or a seasoned veteran, it pays to understand how this industry works. This guide will get you up to speed quickly and includes our picks for the top marijuana stocks.

Best marijuana stocks in 2022

Source: Business Wire

1. Green Thumb Industries

Green Thumb Industries (OTC:GTBIF)owns retail cannabis stores in 12 states across the U.S. and operates 13 manufacturing facilities. Green Thumb holds licenses for 96 retail cannabis locations but has opened only a little over half that many stores.

With the legal recreational marijuana market in Illinois opening for business at the beginning of 2020, this company is benefiting from tremendous growth in its home state. Along with the opportunity to expand into additional states such as New York and New Jersey, the company has significant growth potential.

2. Trulieve Cannabis

Trulieve Cannabis (OTC:TCNNF) is a cannabis grower and retailer that focuses primarily on the Florida medical marijuana market. The company dominates in the Sunshine State by accounting for nearly 50% of total cannabis sales and has been consistently profitable since 2017 -- an achievement few other marijuana companies can claim. Its sales and earnings also continue to soar.

Trulieve plans to acquire Harvest Health & Recreation (OTC:HRVSF) in a deal that will boost its presence in several other states and make it the most profitable multi-state marijuana business in the country.

3. Innovative Industrial Properties

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 (NYSE:IIPR) helps to solve that cash shortage for growing marijuana companies by buying properties owned by U.S. medical cannabis operators and leasing those same properties back to them. The property sale to IIP provides the cannabis operator with much-needed cash, and the lease agreements create a steady revenue stream for IIP.

The COVID-19 pandemic disrupted IIP’s business somewhat, with three tenants receiving temporary rent deferrals. The ancillary company has still grown phenomenally during the pandemic and is highly profitable. Because the company is organized as a real estate investment trust (REIT), IIP returns at least 90% of its taxable income to shareholders.

4. GrowGeneration

GrowGeneration (NASDAQ:GRWG) is another ancillary provider and the largest specialty retail chain focused on the cannabis market. The booming U.S. cannabis industry has created fast-growing demand for hydroponics supplies, which are used to grow plants in liquid nutrient solutions without soil and for organic gardening.

While much of GrowGeneration’s business caters to cannabis growers, the company also sells to other types of gardeners. GrowGeneration has benefitted from the COVID-19 pandemic due to the surge in customers pursuing organic gardening at home.

5. Scotts Miracle-Gro

Scotts Miracle-Gro (NYSE:SMG) is another company benefiting from the same trends that have boosted GrowGeneration’s sales. The company’s Hawthorne Gardening subsidiary ranks as a leading supplier of hydroponic gardening products to the cannabis industry.

Although Hawthorne is the primary growth driver for Scotts, the company still makes well over half of its total revenue from sales of its consumer lawn and garden products. This business has also benefited from the COVID-19 pandemic.

6. Jazz Pharmaceuticals

Jazz Pharmaceuticals (NASDAQ:JAZZ) acquired the cannabis-focused biotech company GW Pharmaceuticals in May 2021. GW’s drug Epidiolex is the first cannabis-based medicine to be approved by the U.S. Food and Drug Administration (FDA). Epidiolex, which treats two rare forms of childhood epilepsy, is generating sales that are routinely surpassing expectations. While new patient starts for Epidiolex slowed slightly with the COVID-19 pandemic, the company has continued to deliver strong revenue growth.

The FDA also approved Epidiolex in August 2020 to treat tuberous sclerosis complex (TSC), a rare organ disease. This approval opens up a significant new market for Epidiolex since around 50,000 people in the U.S. and roughly 1 million people worldwide have the disease.

A brief overview of the marijuana industry

First, let’s cover some of the basics you need to know before investing in marijuana stocks:

• The marijuana industry is divided into three broad categories: Marijuana growers and retailers cultivate and package cannabis products and sell them to consumers. Biotechnology companies develop and market cannabis-based pharmaceutical drugs. Ancillary marijuana businesses provide products and services to cannabis companies without touching the plant.
• Cannabis can be medical or recreational: Medical cannabis patients use cannabis or cannabis extracts to treat health conditions and have recommendations or cannabis prescriptions from physicians. Recreational cannabis users purchase marijuana or cannabis extracts purely for enjoyment and must be age 18 and older and living in a jurisdiction where recreational use of the plant is legal.
• Geography matters: Medical cannabis is legal in many more countries than recreational cannabis. In the U.S., cannabis remains illegal at the federal level. However, a growing number of states have legalized medical and/or recreational cannabis. The rapid growth of the U.S. cannabis market is translating into impressive growth by U.S.-based cannabis companies, while marijuana companies in Canada -- where the plant is already fully legal nationwide -- are expanding more slowly. Canada is one of the global legal markets where supply is outpacing demand and leading to falling cannabis prices.

Impact of COVID-19 on marijuana stocks

The COVID-19 pandemic has affected nearly every part of the global economy, including the cannabis industry. In many U.S. states, cannabis dispensaries were designated as essential businesses. Cannabis sales boomed in some states during the first few months of the coronavirus outbreak, driven in part by more time spent at home and increased anxiety. Marijuana growers and retailers benefited, as did ancillary providers selling gardening supplies and other products to these companies.

However, not all cannabis companies have fared well in the pandemic. Recreational cannabis retailers in tourist destinations such as Las Vegas saw their customer traffic dwindle, causing some of these dispensaries to start focusing on home delivery. In the medical segment, people delayed doctor visits, causing new patient starts to drop. Biotech companies experienced logistical challenges that affected sales and research progress.

Many U.S. cannabis companies appear to be performing well in the wake of the COVID-19 pandemic. However, several Canadian marijuana companies continue to face headwinds, with restrictions on retail cannabis stores still in place.

But, Really, Should I Buy Marijuana 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. If you buy broad-based index funds, you're covered no matter which sectors of the stock market do well. Conservative investors who prefer lower risk are likely better off avoiding investing in marijuana stocks.

But aggressive investors with high risk tolerances will probably find a lot to like about marijuana stocks. The cannabis industry is still in its early stages, and the market opportunities are enormous, especially as more U.S. states legalize cannabis. Investing in pot stocks is a high-risk but potentially high-reward proposition.