Which of these two cannabis companies will reign supreme in the future?
The marijuana industry is expected to triple in the next five years -- and many investors are looking to profit.
As states and entire countries decriminalize or legalize cannabis and/or its components, there are loads of opportunities for entrepreneurs and existing companies.
But as in any nascent industry, there are also loads of risks and bad actors. Whether you're a first-time investor or a seasoned veteran, it pays to understand all of the moving parts.
This guide will get you up to speed quickly.
Cannabis leaves, the raw ingredient fueling marijuana stocks. Source: Getty Images.
How to Invest in Marijuana Stocks
Follow these seven steps if you're thinking about buying cannabis stocks. The following is a summary, but we encourage you to read the entire article linked below for all the details.
1. Understand the types of marijuana products.
- There are two types of cannabis products: medical marijuana vs. recreational marijuana.
- Cannabidiol (CBD) is a cannabinoid that is different than the psychoactive delta-9 tetrahydrocannabinol (THC).
2. Know the different types of marijuana stocks.
- Marijuana growers like Canopy Growth Corporation (NYSE:CGC)
- Cannabis-focused biotechs like GW Pharmaceuticals (NASDAQ:GWPH)
- Providers of supporting products and services like Scotts Miracle-Gro (NYSE:SMG)
3. Understand the risks of investing in marijuana stocks.
- Legal and political risks
- Supply/demand imbalances
- Risk in those that are over-the-counter stocks
4. Know what to look for in a marijuana stock.
Normal stock considerations, including:
- Management team
- Growth strategy
- Competitive position
- Financials (ideally either profitability or strong balance sheet)
- Cannabis production costs
- "All-in" cost of sales per gram
- Cash cost per gram
- For Canadian companies, the extent of international operations and distribution
- Dilution risks via warrants and convertible securities
5. Evaluate the top marijuana stocks and exchange-traded funds (ETFs).
- Marijuana growers like Canopy Growth, Aurora Cannabis (NYSE:ACB), Tilray(NASDAQ:TLRY), and Aphria (NYSE:APHA)
- Biotechs like GW Pharmaceuticals, Cara Therapeutics (NASDAQ:CARA), and Insys Therapeutics (NASDAQ:INSY)
- Ancillary providers like Scotts Miracle-Gro
- ETFs like Horizons Marijuana Life Sciences ETF (NASDAQOTH:HMLSF) and ETFMG Alternative Harvest ETF (NYSEMKT:MJ)
6. Invest carefully.
- For many, avoiding individual investments in the marijuana space entirely is the right call.
- For those who buy in, keeping your marijuana exposure to a small percentage of your overall portfolio limits your risk.
- Pure plays are riskier than more diversified plays.
7. Monitor changing industry dynamics closely.
Laws, regulations, competitive forces, and the business strategies of the companies themselves will all change rapidly over time.
Read more: How to Invest in Marijuana Stocks (Note: includes a list of every major marijuana stock)
But, Really, Should I Buy Marijuana Stocks?
We just went step-by-step through how to invest in cannabis, but just because there's a trendy new sector with lots of press and potential growth doesn't mean you need to put your hard-earned money in it. After all, if you buy broad index funds, you're covered no matter what sector of the stock market does well.
Think through the pros and cons as you read on: Should You Invest in Marijuana Stocks?
Marijuana Legalization in the U.S.: The History and the Future
One of the biggest variables in cannabis investing is to what extent marijuana will be decriminalized or legalized within the United States, both on a state-by-state basis and on a federal basis.
The link below provides a quick spin through what we've seen so far, from decriminalization efforts starting in 1973 to legalization efforts beginning in earnest in 1996 to the political signs of where we seem to be heading.
More Information on Canadian Marijuana Stocks
There's been tremendous interest in Canadian cannabis stocks, because on October 17, 2018, recreational use of marijuana became legal in Canada (it had been legalized on a medical basis since 2001).
Beyond consumption by Canadians, the upside thesis involves operations or distribution to other countries that have legalized or may legalize marijuana to various extents. This includes Germany and particularly the large market on Canada's southern border.
Commonly Confused Cannabis Terms
One of the difficulties in understanding the marijuana industry is the jargon. Fortunately, it's not too complicated once you get a handle on a few main terms.
Marijuana vs. cannabis
Cannabis is the scientific name of the plant (the genus that houses three species). For an investor's purposes, marijuana is synonymous with cannabis, as are more informal nicknames like pot, weed, ganja, dope, grass, 420, sticky icky, etc.
CBD vs. THC
Cannabis is made up of nearly 500 chemical constituents, including many dozens of cannabinoids (substances that act on the body's cannabinoid receptors).
The two most commercially relevant of these cannabinoids are delta-9 tetrahydrocannabinol (THC) and cannabidiol (CBD). Only THC is psychoactive (i.e., makes you high).
Hemp is a strain of a species of cannabis with relatively low levels of THC and relatively high levels of CBD. It has many industrial uses like providing fibers to make rope and clothing.
The tobacco industry is a natural fit for cannabis
Cannabis stocks are down, but they're probably not out.
The largest pot stock in the world is set to release its fiscal second-quarter operating results tomorrow, before the opening bell.
The Canadian cannabis producer generated strong overall revenue growth. But don't overlook several key areas of concern.
TLRY earnings call for the period ending September 30, 2019.
The company's revenue beats expectations, but its net loss is deeper than analysts anticipated.
CRON earnings call for the period ending September 30, 2019.
The company notches its first quarterly net profit. However...
The Canadian cannabis producer's good news in Q3 wasn't as good as it might seem. But its bad news wasn't as bad as it might seem, either.
CARA earnings call for the period ending September 30, 2019.
Canopy's shares have be in free fall for the past six months, but could they go even lower?
Despite plunging revenue projections throughout the marijuana industry, these cannabis stocks are bucking that trend.
Popular cannabis stock Tilray is set to release its operating results later today (Nov. 12).
Both big Canadian cannabis producers announce their latest results this week. Aurora could be in a better position to please investors.
Some stocks stood out even as indexes were little changed.
While good publicity for the cannabis industry, how big of a deal is this for Canopy Growth?
Aphria boasts a strong presence in various international markets, but how strong are its domestic operations?
A host of marijuana stocks report earnings this week, providing clear information on how the cannabis industry is progressing.
Fair-value adjustments and one-time benefits aren't needed for these companies to deliver the green.