Beginner's Guide to Investing in Marijuana Stocks
Are you interested in investing in marijuana stocks but don't know the best way to get started? Don't worry, we've got you covered.
Marijuana stocks are super-hot right now. That's understandable considering the growing number of countries and states that have legalized pot in some form. Some project that the annual global marijuana market could be worth $150 billion or more within the next 10 to 15 years.
Of course, hot stocks can sometimes be too hot to handle. But even an investor who's new to marijuana stocks can learn what to do and what not to do.
This beginner's guide to investing in marijuana stocks will address the important things that you need to know, from the basics of the marijuana industry to the risks involved with investing in marijuana stocks. And, yes, we'll delve into which marijuana stocks look like the best picks for 2019, too. Read on and you'll be armed with all you need to know to participate in the "green rush" of the cannabis industry.
Image source: Getty Images.
Basics about the marijuana industry
Marijuana has been used for thousands of years, primarily for two purposes: as medicine and for getting high. That's still the case today. But for much of the last century, marijuana has been illegal in most of the world for either purpose.
The dynamics are changing rapidly, though. Medical marijuana is now legal in more than 30 countries. Recreational pot is currently legal in only a handful of countries, but that number could grow also.
Marijuana remains illegal at the federal level in the U.S. However, more than 30 states have legalized medical marijuana. U.S. territories Guam and Puerto Rico also allow the legal use of medical marijuana. Several of these states plus the District of Columbia have legalized recreational marijuana. More states are considering legalizing recreational pot as well.
While U.S. federal laws still prohibit the use and sale of marijuana, hemp was legalized at the national level in December 2018. Both marijuana and hemp are made from the cannabis plant. The big difference, though, is that hemp contains very low levels of tetrahydrocannabinol (THC) -- the primary chemical in cannabis that causes individuals to get high.
Both marijuana and hemp contain another important chemical ingredient, cannabidiol (CBD). CBD isn't psychoactive like THC. It has demonstrated benefits in treating forms of epilepsy and could have other therapeutic uses such as relieving anxiety and insomnia and helping reduce inflammation.
A wide variety of products are made from marijuana. These include cannabis flower, CBD oils, edibles, cannabis-infused beverages, concentrates used in vaping, creams, and lotions. The marijuana industry includes businesses that operate throughout the supply chain involved in making and marketing these products.
How to invest in marijuana stocks
Now that you know some basics about the marijuana industry, let's dive into some of the nuts and bolts of investing in marijuana stocks. First, it's important to note that there are three primary kinds of marijuana companies:
- Marijuana growers -- companies that cultivate marijuana (typically in indoor facilities and greenhouses).
- Cannabis-focused biotechs -- companies that develop prescription drugs based on ingredients found in cannabis.
- Providers of ancillary products and services -- companies that provide key products and services to the marijuana industry, including consulting, distribution, hydroponics, lighting systems, and packaging.
You should also remember that the principles that apply to investing in any kind of stock also apply to marijuana stocks. Check out a company's management team with a special focus on top executives' track records in the industry or in similar industries.
Research the company's strategy for growth and expansion. For example, one company might envision growing primarily through acquisitions, while another might prefer to grow organically.
Look at the competitive landscape and find out how the company intends to differentiate itself from rivals. Identifying a company's top partners is also important since they can help it be more competitive.
See if the company is profitable yet. Keep in mind that the marijuana industry is still in its early stages, so many companies won't yet be profitable. That's not necessarily a bad thing at this point. However, try to determine how quickly the company expects to become profitable and how it will fund operations in the meantime.
Most, if not all, of this information can usually be found on companies' investor relations websites. The dynamics of the industry can change quickly, though. So it's also important to stay up-to-date on the latest marijuana news and analysis in this emerging market.
For marijuana stocks, in particular, it's critical to understand which geographic markets a company is targeting. For example, some smaller marijuana growers focus only on the Canadian market. Larger marijuana growers are more likely to have operations in Europe and Latin America in addition to North America. Some providers of ancillary products and services primarily serve U.S. marijuana businesses. Each geographic market has a different opportunity and different risks (which we'll discuss a little later).
Top marijuana stocks to buy in 2019
For now, most of the biggest marijuana stocks are based in Canada. That's primarily because Canada was the first major economic power to legalize recreational marijuana. However, there are also quite a few U.S. marijuana stocks that are worthy of consideration. There are several top marijuana stocks to buy in 2019. Below are five that include both U.S. and Canadian companies.
| Company |
Type |
Country |
|---|---|---|
|
Constellation Brands (NYSE: STZ) |
Marijuana grower (via partnership) | U.S. |
| Innovative Industrial Properties (NYSE: IIPR) | Ancillary products/services provider | U.S. |
| KushCo Holdings (NASDAQOTH: KSHB) | Ancillary products/services provider | U.S. |
| OrganiGram Holdings (NASDAQOTH: OGRMF) | Marijuana grower | Canada |
| Origin House (NASDAQOTH: ORHOF) | Ancillary products/services provider | Canada |
Constellation Brands
Constellation Brands is best known for its premium beers including Corona and Modelo. However, the company's $4 billion investment in Canopy Growth (NYSE: CGC) in 2018 put Constellation front and center in the global marijuana industry.
The duo of Constellation and Canopy is arguably the strongest player in the marijuana market. Constellation brings ample financial resources and a track record of building successful consumer brands. Canopy has been a leader in the Canadian marijuana market for several years, and its production capacity dwarfs that of nearly all of its rivals.
There are other close partnerships between marijuana growers and companies with primary operations outside of the cannabis industry. However, Constellation has made the biggest investment so far. That investment has enabled Canopy Growth, among other things, to move forward into the U.S. hemp market more quickly than its peers.
Why not buy Canopy Growth instead of Constellation? Mainly because Constellation gives you the best of two worlds. The company continues to dominate in the premium beer market and generate strong profits. But Constellation's 38% stake in Canopy Growth gives investors a way to also profit from the boom in global marijuana markets.
Innovative Industrial Properties
Innovative Industrial Properties is organized as a real estate investment trust (REIT) and owns properties that it leases to medical marijuana businesses. REITs, by the way, are investment companies that own income-generating real estate properties. There are a couple of nice benefits for investors in owning a marijuana-focused REIT.
First, it provides some diversification. Innovative Industrial Properties owns 11 properties that it leases to eight customers. The REIT can be successful even if one or two of its customers aren't successful.
Second, REITs are required to distribute at least 90% of their taxable income to shareholders as dividends. Innovative Industrial Properties' dividend yield should continue to increase as its profits grow.
And those profits should grow. Innovative Industrial Properties currently leases properties in 10 states. Four of those states are projected to have marijuana markets of at least $1 billion by 2022. The company should have plenty of room to expand in these states and elsewhere.
KushCo Holdings
KushCo Holdings ranks as the leading supplier of packaging solutions to the U.S. cannabis industry. The company manufactures a variety of products -- including pop-top bottles, tubes, and vaporizer cartridges -- designed to meet the needs of cannabis growers and dispensaries.
While KushCo's sales are skyrocketing, the company isn't profitable yet. One big reason why that's the case is that KushCo continues to invest in expansion. KushCo has also experienced some growing pains in the form of higher air freight and quality control costs associated with meeting the surging demand for its products.
However, KushCo should be able to eventually reach sustainable profitability as it capitalizes on the growth opportunities of the marijuana market in the U.S. and in other countries. KushCo has especially targeted Canada and Europe as opportunities for growth.
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