- The legal cannabis market is expected to be worth over $73 billion by 2027, providing plenty of opportunities for investors to get in on the ground floor
- Current patchwork legalization has led to pockets of multi-billion-dollar markets of legal industries in a sea of illegality, which provides significant earnings opportunities for entrepreneurs and investors
- However, the oscillating specter of federal legalization means that the cannabis market is incredibly volatile – and if legalization occurs, companies that are currently profitable may fall to the wayside as competition blazes
- That said, investors have number of cannabis-related stocks to dabble in; though many of the most successful are ancillary companies such as Scotts Miracle-Gro, which provides the equipment and fertilizer needed for hydroponic production operations
The legal cannabis market is projected to be worth over $73 billion by the year 2027, with the value more than doubling between now and 2025 alone. And as cannabis is legalized across the nation, entrepreneurs and investors alike have flocked to potential profits found in cannabis-related business opportunities and securities on (mostly Canadian) stock exchanges.
But federal indecision on how – or whether – to decriminalize marijuana has led to a patchwork of multi-billion-dollar markets where enormous “unicorn” companies compete against hordes of startups. While such piecemeal regulation (and the oscillating specter of federal legalization) leads to incredible market volatility, it also provides investors with a chance to hop into a darling industry early and ride that volatility to the top.
But first, you have to have an idea of which new cannabis ventures are likely to turn a profit – and which will drag you down with them.
The Patchwork Legalization of Cannabis
Marijuana use is characterized as having one of two motivations: medicinal or recreational.
Medicinal users have a recommendation or prescription from a medical doctor to use cannabis and extracts to treat health conditions.
On the other hand, recreational users purchase marijuana for enjoyment and have more stringent restrictions, such as a minimum purchase age (usually 18 or 21) and residing in or visiting a jurisdiction where recreational use is legal.
The distinction (and regulatory differences) between medical and recreational marijuana is defined and enacted by the legalizing state. And though cannabis remains illegal federally, growing legalization by local governments has led to booming growth in legal markets, which in turn translates into impressive growth by companies that get in on the ground floor and take advantage of the new markets.
But if federal regulation does come around, it’s unlikely that this hunger for THC products will continually fuel explosive growth. In fact, Canadian markets – which have had legal marijuana nationwide since 2018 – are already seeing a shift to supplies that outpace demand, which lead to falling marijuana and cannabis stock prices.
In other words: if you want to be successful investing cannabis stocks, you’ll likely have to get in on the ground floor…or resign yourself to the long haul.
Marijuana Industries: Pandemic Performance and the Future of THC
You can divide the marijuana industry into three categories:
- Growers and retailers cultivate, package, and sell cannabis products to consumers
- Biotech companies develop and sell cannabis-based pharmaceutical drugs and therapies
- Ancillary businesses provide products and services to help these industries succeed – without ever taking a toke themselves
Each of these industries functions in their own haze of legality, growth potential, and current success – especially during the pandemic market.
For instance, while recreational cannabis sales boomed in some states thanks to more home-time and increased anxiety, it dropped in larger tourist and commuter cities where customer traffic dwindled.
And as doctor visits (and therefore medical marijuana prescriptions) dropped, the industry saw a dearth of new patients to fuel their growth.
Even biotech companies battled their own challenges during the pandemic thanks to logistical issues in sales, research, and raw material supplies.
But in a typical market, some of the most profitable long-term cannabis businesses have been the ancillary businesses, such as equipment manufacturers and fertilizer producers, that have established markets elsewhere. Additionally, many multi-state operators, or MSOs, have also proven wildly successful.
MSOs are the chameleons of the pot world. They can take part in cultivation, processing, or retail operations – or all of the above – in several states by investing in licenses in each market. And although they can’t ship product across state lines, MSOs with resilient management structures, shared capital pools, and the proper expertise are predicted to be the biggest successes when federal legalization permits interstate trading.
Cannabis Stocks: A Field of Unique Challenges
Cannabis stocks are issued by companies that participate in any cannabis-related ventures, be it directly or indirectly. But as a trendy, budding industry with lots of press and growth potential, it can be difficult to tell the legitimate or worthwhile stocks from the scams and the duds. So how do you tell the haves from the have-nots in a new industry plagued by questions of legality?
You can start by considering the numerous – but not insurmountable – challenges presented by the industry.
One particular concern with cannabis stocks is the fact that you can’t rely on decades of financial reports, technical indicators, or peer performance. Nor can you look to stocks with big balance sheets, as even companies that have grown exponentially are not guaranteed future performance.
In fact, you might look at cannabis stocks as startups with unusually bloated balance sheets and cash flows. And while larger startups are more likely to have the funds for investing in new grow hubs and dispensaries, federal law also prohibits federally regulated banks from lending to cannabis companies, thereby limiting outside financing opportunities.
Other challenges include limited tax deductions and the presence of limited licensing opportunities in some states, which leads to a first-come-first-serve model in select markets – and a free market free-for-all in others.
Lastly, it’s essential to recognize that federal legalization will allow cannabis companies to grow and spread into new markets and across state lines. Over time, this will force firms to change their business models – likely flooding some markets and leaving others woefully unsaturated.
All of these challenges mean that cannabis is likely to remain a volatile industry for the foreseeable future. And with long-term volatility comes high risks – and the potential for high regards for aggressive investors willing to take a chance.
How to Invest in Cannabis Stocks
Once you’ve decided that investing in cannabis stocks is for you, the next step is to know where to start.
One place is with individual stocks in one of the three major marijuana industries: growers and retailers, biotech companies, and ancillary firms.
For instance, if you want to get directly involved with marijuana production, you could seek out “blue chip” cannabis stocks: large, somewhat stabilized firms with healthy bottom lines, large cash infusions into growth potential, and plenty of growth under their belt.
Companies that have an affiliation with the industry and established revenues in other avenues are another potential investment. For example, a number of manufacturers and retailers dealing in hydroponics equipment, fertilizer, and even “head shop” products have proven profitable in recent years.
And of course, you can invest in pharmaceutical companies researching cannabis products. One such example is GW Pharmaceuticals, the only company with an FDA-approved, cannabis-based drug on the market.
New Cannabis Ventures on the Market
If you’re still not sure where to start looking for legal cannabis investments, we’ve compiled a few places to start.
#1. Trulieve Cannabis (TCNNF)
Trulieve Cannabis is a grower and retailer with an outsize presence in the Florida medical market – in fact, the company accounts for nearly 50% of total cannabis sales in the Sunshine State. And as the company’s sales and earnings continue to soar, it plans to acquire Harvest Health & Recreation to boost its presence in other states and transition into an MSO.
#2. Green Thumb Industries (GTBIF)
Green Thumb Industries owns retail cannabis stores in a dozen states with over a dozen manufacturing facilities. While this company has some growth under its belt, it’s only executed on around half of its 96 retail cannabis licenses – leaving plenty of room to expand later.
#3. Jazz Pharmaceuticals (JAZZ)
Jazz Pharmaceuticals bought GW Pharmaceuticals in May 2021, making them a cannabis stock by way of GW’s novel cannabis-based treatment for childhood epilepsy. The company made headlines on its drug again in August 2020 when it was approved to treat tuberous sclerosis complex (TSC) as well.
#4. Hydrofarm Holdings Group, Inc. (HYFM)
Hydrofarm Holdings Group manufactures and markets hydroponic products, such as climate control and lighting equipment, garden accessories, and other products. While not purely a cannabis stock, its products are a necessity for hydroponic-based cannabis farms, fitting it squarely into the cannabis category for some investors.
#5. Scotts Miracle-Gro (SMG)
Scotts Miracle-Gro’s subsidiaryHawthorne Gardening is a leading supplier of hydroponic gardening products to the cannabis industry. While they’re considered a cannabis stock by many investors, more than half of their revenue comes from non-cannabis products, making them one of the more stable stocks on this list.
Of course, if individual stocks are too volatile for your taste, a number of legal cannabis funds can provide a gateway into different segments of the market without introducing unnecessary volatility into your portfolio. For instance:
- The Corporate Cannabis ETF and ETFMG Alternative Harvest ETF both track the Prime Alternative Harvest Index, which currently invests in 37 companies in the legal market
- Investing in the AdvisorShares Pure US Cannabis ETF offers exposure to U.S.-based MSOs, potentially providing greater longevity and profit potential
- And the Cambria Cannabis ETF invests at least 80% of its assets in cannabis companies, with a broad market capitalization of micro-, small-, and mid-cap stocks