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How to Invest in Marijuana Stocks

Here are seven straightforward steps to help you invest in high-growth — but high-risk — marijuana stocks.

Global marijuana markets are growing like a weed. Worldwide spending on cannabis is on pace to top $29 billion in 2020, according to Statista. The total is projected to increase to $63.5 billion by 2024, for a compound annual growth rate (CAGR) of 21%. With this type of impressive growth, it’s no wonder that many investors are interested in publicly traded cannabis stocks.

What’s the best approach to marijuana investing? There are seven key steps:

Here’s all you need to know about this seven-step process for investing in the fast-growing marijuana industry.

Image source: Getty Images.

1. Understand the types of marijuana products

There are two broad categories of cannabis products:

  • Medical marijuana: Medical marijuana is broadly legal in 33 U.S. states plus the District of Columbia, and in over 30 countries. A prescription from an authorized healthcare provider is typically required for patients to obtain medical marijuana; it’s frequently prescribed to adults for anxiety, depression, pain, and stress.
  • Recreational marijuana: Eleven U.S. states plus D.C. have legalized recreational marijuana for adult use. Recreational marijuana has been legal in Canada since October 2018.

2. Know the different types of marijuana stocks

There are also different types of marijuana stocks, and the three primary ones are:

  • Cannabis growers and retailers: These companies, which include Canopy Growth, cultivate cannabis (often in indoor facilities and greenhouses), harvest the crops, and distribute the end products to customers. Some also focus on operating retail stores for selling medical and/or recreational cannabis.
  • Cannabis-focused biotechs: These are biotechs (such as GW Pharmaceuticals) that develop cannabinoid drugs.
  • Providers of ancillary products and services: These companies support marijuana growers by providing products and services such as hydroponics products and lighting systems, a key area of focus for Scotts Miracle-Gro; packaging solutions; and management services.

3. Understand the risks of investing in marijuana stocks

Investing in any type of asset comes with some degree of risk. However, investing in marijuana stocks has specific risks you should understand.

  • Legal and political risks: Selling marijuana remains illegal at the federal level in the U.S. Even though cannabis businesses operate in states that have legalized marijuana for either medical or recreational purposes, the Department of Justice could clamp down at any time. In addition, 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 has increased for federally legalizing marijuana, but there’s no guarantee it will happen.
  • Supply/demand imbalances: Canadian marijuana growers initially undertook major expansion initiatives to increase production capacity to meet recreational marijuana demand. However, some companies have now cut back production. When supply outstrips demand, prices usually fall. In this scenario, marijuana growers could find their revenue and earnings decreasing, which would hurt their stock prices.
  • Over-the-counter (OTC) stock risks: OTC stocks don’t have to file regular financial statements, which are important for investors, enabling them to assess the risk of the stocks. They also don’t have to maintain minimum market caps (the total value of outstanding shares), which can result in a low level of liquidity (how easily the stock can be bought or sold without its price being affected).
  • Financial constraints: Many cannabis companies are unprofitable and face the prospect of running out of cash. They often have to raise capital by issuing new shares, which dilutes the value of existing shares. Even with this option, obtaining enough capital to fund growth can be challenging.

4. Know what to look for in a marijuana stock

When considering any marijuana stock to invest in, you should:

  • Research the management team
  • Examine the company’s growth strategy and competitive position
  • Check out the company’s financials
  • Research how many warrants and convertible securities the company has issued (a high number could mean that the stock will be diluted in the future, potentially causing the share price to drop)

Specific metrics to research for marijuana growers include:

  • All-in cost of sales per gram: Includes all costs of producing cannabis.
  • Cash cost per gram: Includes all costs of producing cannabis except amortization, packaging costs, and inventory adjustments.

Marijuana growers with lower cost structures will tend to be more competitive.

5. Evaluate the top marijuana stocks and ETFs

Now for the fun part: digging into the top marijuana stocks. You might also want to check out marijuana-focused exchange-traded funds (ETFs).

Below is a list of top marijuana stocks and ETFs to consider. Note that this list isn’t comprehensive, and includes only marijuana stocks with a market cap of at least $200 million.

Here are seven straightforward steps to help you invest in high-growth — but high-risk — marijuana stocks.

Best Hemp Stocks To Buy: Raking In The Green

Marijuana and hemp are the two main branches of the cannabis plant family, but there is an important difference.

Hemp is defined as cannabis that contains 0.3 percent or less of the psychoactive chemical THC, while marijuana contains a larger amount of the compound.

The recent legalization of hemp is generating excitement among investors. After decades of suppression, farmers are once again permitted to cultivate and sell this versatile plant. Companies that stand to profit from growing and distributing hemp and hemp-based products stand to realize significant profits, which may mean good news for those that invest now.

A Quick History of Hemp in the United States

When the 2018 Farm Bill was signed into law, hemp production became legal in the United States.

However, this isn’t a first for the country. Hemp arrived in North America as early as 1606, and for centuries it played a critical role in the economy.

In fact, it was so important that it became the subject of legislation in the 1700s. By law, farmers in certain colonies were required to grow hemp alongside other staple crops.

Hemp was used in the manufacture of rope, lamp fuel, clothing, and paper. In some areas, it could be exchanged in lieu of currency.

The Declaration of Independence was drafted on hemp paper by Thomas Jefferson, and Abraham Lincoln relied on hemp seed oil to fuel his household lamps.

Eventually, even Henry Ford began experimenting with hemp, designing an entire auto body from hemp fiber.

The advantages of hemp cannot be overstated.

It produces four time more paper per acre than trees, and hemp fiber is ten times stronger than steel.

According to a 1938 Popular Mechanics report, it could be used in more than 25,000 products at the time the research was published.

Today, that number is exponentially higher.

Unfortunately, when concerns about the negative effects of marijuana surfaced in the first half of the 20th century, hemp was targeted as part of the problem.

The 1937 Marijuana Tax Act discouraged cultivation of hemp by taxing it heavily.

In 1970, the Controlled Substances Act classified hemp as a Schedule I drug, making it illegal to grow and sell under most circumstances. For investors the good news is the 2018 Farm Bill changes all of that.

Hemp-Based CBD Products Taking the Marketplace by Storm

The return of industrial hemp has farmers, manufacturers, entrepreneurs, and innovators scrambling to make the most of this massive opportunity.

Many investors are weighing their options for getting in on the action.

Analysts’ estimates of market potential for hemp-based products vary widely, from a conservative $1.3 billion by 2022 to an astonishing $22 billion by 2022.

One of the biggest areas of growth is in wellness products that contain hemp-based cannabidiol (CBD).

From cosmetics and skin care creams to dietary supplements, CBD is rapidly gaining popularity among consumers.

The major players in this space are already showing significant gains in sales, which leads to a big question for investors. What are the best hemp stocks to buy that are most likely to generate substantial returns?

Should You Invest In Charlotte’s Web Holdings?

Charlotte’s Web is already leading the market when it comes to CBD wellness products.

It is ranked number one among organizations in this area of the wellness industry, offering consumers a variety of capsules, topical creams, tinctures, and gels.

Year over year, the third quarter of 2018 showed a 57 percent increase in sales, and the company generated nearly $8.7 million in earnings during the first three quarters of 2018.

Charlotte’s Web is likely to remain in its industry-leading position, because it enjoys a large head start.

With a 40,000 square foot research and manufacturing facility and a list of 2,700 retail locations already carrying Charlotte’s Web products, new entrants have a lot of ground to make up.

Charlotte’s Web already cultivates 300 acres of hemp plants, thanks to previous Farm Bill legislation that permitted pilot programs for research purposes. This puts the company far ahead of its peers.

Is Canopy Growth a Buy or Sell?

Canopy Growth [NYSE: CGC] is not yet operating in the United States, and this company hasn’t ever turned a profit.

Unlike Charlotte’s Web, it simply isn’t a major player in the CBD market at this time. However, those willing to accept a certain level of risk see great potential in Canopy Growth.

First, as soon as the US legalization of hemp was announced, the company’s CEO announced plans to enter the US market.

This could mean big competition for Charlotte’s Web, because Canopy Growth is already well-established in other parts of the world.

When measured by market cap, it is the biggest marijuana producer, and it has a hemp operation underway in Canada.

Canopy Growth [NYSE: CGC] has the technology required to extract CBD from hemp, and it recently purchased a Colorado-based hemp researcher.

Perhaps most important of all, Canopy Growth [NYSE: CGC] has an existing relationship with Constellation Brands [NYSE: STZ], which produces alcoholic beverages. This could be exceptionally valuable, as the potential market for CBD infused beverages shows great promise.

CV Sciences: Buy or Sell

Though CV Sciences hasn’t quite surpassed Charlotte’s Web in the hemp-based CBD market, it comes pretty close.

Some analysts believe it is only a matter of time before CV Sciences [OTC: CVSI] takes over the number one spot.

This company produces the top selling CBD oil brand, PlusCBD Oil, which is currently on the shelves of more than 2,000 retail locations.

Year over year, CV Sciences showed revenue growth of 143 percent in the third quarter of 2018, and earnings came in at $3.3 million.

Overall, CV Sciences stock gained 650 percent, which is one of the best results in the cannabis industry for 2018.

Best of all, CV Sciences has an exciting new product expected to come to market relatively soon.

The company is working on a smoking cessation medication that combines hemp-based CBD and nicotine to eliminate cravings for tobacco products. If it is as effective as the company indicates, a large demand for this smoking cessation solution is expected.

Choosing a path to enter the world of hemp investment is a challenge. Learn more by visiting Financhill online for information on the best investment options in every industry.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.

Best Hemp Stocks To Buy: Raking In The Green Marijuana and hemp are the two main branches of the cannabis plant family, but there is an important difference. Hemp is defined as cannabis that