Beginner’s Guide to Investing in Cannabis Stocks

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Marijuana stocks are currently among the hottest trends in investing. If you're interested in investing in cannabis, you probably have lots of questions about getting started. So let's dive in before all the profits go up in smoke.

To quote Bob Dylan, the man who introduced The Beatles to pot, “The times they are a-changin'.” Public support for the legalization of marijuana has never been higher: 62%, according to the Pew Research Center. And although “weed” remains technically illegal in the eyes of the federal government, a growing number of states have legalized medicinal marijuana (MMJ), with a bunch even allowing recreational use.

Check out this map. As of October 2019, the states in blue have legalized recreational and medical use. The states in dark green have legalized medical use. The states in light green have legalized medical use with limited THC. Lastly, the states in gray have no legalization at all. States marked with “D” have decriminalized use.

Licensed from Creative Commons.

If this trend continues, this map should only grow bluer. In fact, it's likely that we'll see the federal prohibition on marijuana lifted relatively soon.

What Does Cannabis Legalization Mean for Investors?

What was once black market is now big business. As the legal cannabis industry expands, there will be legitimate gains to be made.

However, first off, we've got some bad news. It's likely the really big early-bird profits have already been made. The cannabis stock space has already seen some crazy-high disruptors. In the last few years, a few marijuana industry stocks have shot up by more than 200% in short order… only to level off or even bottom out.

However, if you smartly play the trend, there's a chance you can still get in on some great green profits.

Tilray: A Good Example

Let's look to our neighbors to the north for an example. In 2018, Tilray Inc. (TLRY), an Ontario-based cannabis company, skyrocketed by more than 800% in the first three months after its IPO. It went from $22 per share in July 2018 to $214 in September.

Why did the stock surge so high in just weeks? We can chalk it down to sentiment. Cannabis was all over the news. Here in the U.S., it was a hot topic during the 2018 midterm elections. And Tilray's home base, Canada, became the Great Green North by legalizing marijuana use. Everyone was very excited about pot, and Tilray looked like a great way to take advantage of the fun.

But then Tilray took a nosedive. Why? When a stock builds on sentiment, it's probably overvalued.

Not surprisingly, the company reported a few quarters of earnings that missed what were likely too-optimistic expectations.

Now, many of the losses Tilray reported were due to the fact that the company is spending a ton of money on acquisitions, rather than declining revenue. (In fact, the company has seen some awesome revenue growth.) But investor sentiment can be fickle, and Tilray stopped being the flavor of the week.

History Repeats

This will likely be the pattern for marijuana stock investing. In fact, we can look to what happened in the markets around the time of the repeal of alcohol prohibition to get an idea of the overall picture.

Back then, alcohol stocks soared in the months leading up to repeal. But then they tanked afterward. “Buy the hope, and sell the news,” as Barron's says. That sounds an awful lot like what happened with Tilray in Canada.

If this is indeed the case, right now — before the U.S. legalizes marijuana — is the time to get into cannabis stocks if you're going to do it.

Should You Buy Cannabis Stocks?

It's very important to realize marijuana stocks are extremely volatile. Investing in cannabis stocks is very much a speculation — something we here at Investor Junkie don't recommend for everyone.

Why is it so risky? Well, aside from the fact that sentiment can lead to overvaluation, which plays a big part in a stock's rise and fall (as with Tilray), there are a few other factors that make marijuana investing risky.

  • On a federal level, weed is still illegal in the U.S. Although there are protections in place for state legalization policies, the Department of Justice theoretically could still pull the rug out from everyone's feet and destroy the industry.
  • Companies in the marijuana industry face banking challenges. This is starting to change, but right now, many banks won't service companies in the cannabis industry. This can make company operations a bit difficult.
  • This is still a nascent industry. The legal cannabis industry is still in its infancy. We really have no idea what's going to happen or what direction the industry will take.

That said, if you have a strong stomach and can handle portfolio risk (say, if you're in your 20s and have plenty of time to make up for losses), it could be a great opportunity.

However, there are less risky options than investing just in the companies that grow and sell marijuana.

Here are some ideas for investing in cannabis that aren't a total gamble.

How to Invest in Cannabis Stocks?

Cannabis ETFs

Granted, individual stocks are where the biggest, craziest gains are made. But investing in just one pot stock is a risky proposition. You can lessen that risk by choosing an exchange-traded fund (ETF) that will give you a basket of investments.

You can read our guide to ETF investing here.

Right now, the leading cannabis ETF in the U.S. is the ETFMG Alternative Harvest (MJ). This is a very diversified fund, containing stocks from different aspects of the legal weed industry: cultivators, service providers, and pharmaceutical companies, as well as the big tobacco companies that are currently researching cannabis or partnering up with pot producers.

Service and Supply Providers

Pot doesn't grow in a vacuum. The companies that cultivate, harvest, and sell marijuana rely on a chain of service and supply providers.

Investing in these kinds of stocks can be safer than straight marijuana plays, because they usually service more than just the weed industry.

Take Scotts Miracle-Gro (), for example. The Motley Fool has singled it out as a stellar opportunity for betting on marijuana. That's because Scotts has a huge hydroponics-focused division. And most marijuana is grown with a hydroponic system.

But Scotts also makes a lot of everyday lawn and garden products. You may even have a big bag of Miracle-Gro fertilizer in your shed. There's plenty of cushioning here, no matter what the cannabis industry does.

Another surprising way to invest in marijuana is via Microsoft (MSFT). One of the world's biggest technology companies, it has exposure to the pot industry thanks to its partnership with KIND Financial. KIND provides technological services to companies in the cannabis industry. As legalization spreads, growers, dispensaries, and regulators will all need software to help track strains and sales.

Synthetic Cannabinoid Biotechs

“Cannabinoids” are the chemical compounds that interact with your brain's cannabinoid receptors. (Yes, you are hardwired for weed.)

Research suggests that, besides getting you high, cannabinoids can have all sorts of medical benefits, including:

  • Pain relief
  • Inflammation reduction
  • Muscle relaxation
  • Appetite stimulation
  • The destruction of cancer cells

The medicinal marijuana industry seeks to connect patients with the plants that can help them.

But there's also an industry that involves using ultra-pure synthetic cannabinoids in new pharmaceutical products. One of these companies, GW Pharmaceuticals (GWPH) made headlines in 2018 when the FDA granted approval to its Epidiolex drug. Epidiolex, which treats seizures associated with a rare but severe form of pediatric epilepsy, was the first cannabinoid-derived pharmaceutical to receive FDA approval.

GW Pharmaceuticals has more cannabinoid products coming down the line. It's worth keeping an eye on this biotech stock.

CBD Companies

CBD is one of the hottest ingredients for consumer products. It's being added to everything, and there's likely a CBD-focused retail shop in your town.

But what is it? CBD stands for “cannabidiol,” which is an active ingredient in cannabis. Much of the CBD on the market today is extracted from hemp plants that are not cultivated for drug use. This extract contains no or hardly any THC (the psychoactive compound found in marijuana). You can't get high from CBD, but studies suggest that it may have some therapeutic benefits.

CBD that contains less than 0.3% THC is completely legal in the U.S. So the companies with exposure to it are safer than marijuana stocks.

Aphria (APHA) is a major-index–listed company based in Canada that produces both CBD and medical cannabis. The company has an extensive lineup of CBD-derived products, including a skincare line. The company is certainly helping to bring the CBD compound into the mainstream.

Plus, when full legalization occurs in the U.S., Aphria will be right there to reap the profits.

Conclusion

Investing in cannabis may not be the safest way to give your portfolio a high, but there are definitely still opportunities for investors who get in now.

Even if you're sitting on the sidelines, it's exciting and fun to watch this new industry score.

Kat Peach

Although Katherine Peach originally intended to become an archaeologist, she has now been working as an editor in the financial publishing industry for more than 10 years. (Unearthing ideas about improving your personal finances isn’t such a bad career alternative!)

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