A Complete Guide on How to Invest in Marijuana in 2020
Unless you’ve been living under a rock for the past few years, you must’ve heard a thing or two about the booming cannabis market and the growing marijuana industry. But, do you know enough to put your money on it? Do you need some pointers on how to invest in marijuana and cannabis stocks? Afraid you are not aware of all the risks?
Follow this guide to learn all about the steps you need to take and the aspects to consider before deciding to put your hard-earned cash into weed stock.
But first things first…
Should You Invest in Cannabis Stocks Right Now?
Marijuana stocks have taken investors on a rollercoaster in the past year. Starting as the hottest trend at the beginning of 2019, they’ve gone down by almost 70% in the summer. Investing in cannabis has seen its ups and downs with marijuana companies still struggling to stay afloat in a market that is volatile at best.
But, things are looking up. There is Canada hitting the market in 2020 with branded edibles, more and more states are jumping on the recreational weed bandwagon, and polls show growing support for adult-use legalization on a federal level.
As the industry matures and stabilizes and more job opportunities are created, long-term expectations are still in play and investing in weed will once again be seen as a profitable opportunity. Not to mention that projections regarding the growth of the industry remain strong as Wall Street predicts sales reaching $50 to $200 billion by the end of the next decade.
With that out of the way, let’s get down to the details of what to do and what to take into account before taking the plunge and investing in the marijuana market.
Learn About the Different Types of Marijuana Products
In order to learn how to invest in marijuana, you must first get an overview of the marijuana industry and the types of weed available on the market — medical and recreational marijuana.
Medical cannabis is currently legal in 33 US states, including the District of Columbia. To be able to buy medical marijuana you need to suffer from a medical condition as well as have a written recommendation from a doctor. Not all states have the same qualifying conditions and not all physicians are willing to recommend medical cannabis for their patients, a point to keep in mind when considering how to invest in medical marijuana.
Medical marijuana is mostly used to manage pain, as well as muscle spasms and some forms of epilepsy and seizures. CBD and THC are the two most commonly used cannabinoids to treat medical conditions. It should be noted that there are over 100 cannabinoids in the cannabis plant, all of which are waiting to have their health benefits explored. This means that in the future there might be other cannabinoids on the medical marijuana market and more chances for those interested in investing in cannabis.
At the moment, the FDA has approved one CBD-based drug, Epidiolex, used as a treatment of LGS and Dravet syndrome, rare forms of epilepsy in children. Epidiolex was approved by the FDA in 2018 and was given a green light in the UK earlier this year. The FDA has also approved three synthetic THC medicines — dronabinol (Marinol, Syndros) and nabilone (Cesamet) — for the treatment of the side-effects of chemotherapy.
What does this mean for those wishing to invest in medical marijuana?
When buying medical marijuana stocks, potential investors should focus on the company’s drug pipeline and the money it spends on research. Given that research on the medicinal properties of cannabis is still in the early stages, investors should expect to wait a bit longer to get a return on their investment.
Just look at GW Pharmaceuticals, one of the biggest players in the medical cannabis industry. It took them 19 years to develop a drug and get it approved. If you are willing to wait, investing in medical marijuana could pay off in the long-run.
Recreational cannabis is legal in 11 US states and the District of Columbia, as well as in Canada and Uruguay (the only two countries in the world that have fully legalized marijuana).
Unlike medical marijuana, which mostly focuses on CBD, recreational cannabis primarily uses THC, the psychoactive compound of the cannabis plant, giving users the high they usually seek when consuming weed. Sometimes, though, they are in need of THC detox.
When it comes to how to invest in marijuana, the adult-use cannabis market shows more promise.
Recreational cannabis caters to a wider audience — hence why the projected growth rate for the adult-use weed industry is much faster than that of medical cannabis, 18.4% and 11.8%, respectively.
However, there are two obstacles investors should be aware of that are stopping the adult-use cannabis market from reaching its full potential: legalization across the nation and high taxes imposed by the states.
Learn About the Different Types of Marijuana Stocks
Investing in pot stocks should not be attempted unless you know the different kinds of marijuana companies on the market. Basically, there are four kinds of weed companies:
Growers and Producers
These are the companies that cultivate cannabis and the dispensaries that distribute and sell the products.
One of the biggest Canadian marijuana stocks on the market, grower and producer Canopy Growth (NYSE:CGC), has certainly been through the good and bad throughout the course of the year. It may not be one of the best marijuana stocks to invest in right now, but it is not ready to be written off just yet. Known for its celebrity endorsements and partnership with major alcoholic beverage company Constellation Brands, Canopy Growth is still a big player in the marijuana industry.
Biotech and pharmaceutical companies are focused on developing and producing cannabis-based prescription drugs.
The biggest company in this area is GW Pharmaceuticals (NASDAQ:GWPH). Also, one of the biggest pharmaceutical industries in the world and the producer of the only FDA approved CBD-based drug, GW stock is one of the best medical marijuana stocks to invest in 2020.
Ancillary Product and Service Providers
This category covers companies that sell marijuana-related products, such as equipment and lighting systems, as well as providing management and consulting services.
Scotts Miracle-Gro (NYSE:SMG) is regarded as the leading provider of hydroponics products for cannabis cultivation and a leading company in the service sector of the cannabis industry. The company recently published strong Q4 results as well as optimistic predictions for 2020 with projected sales growth of 4 to 6%.
Exchange-Traded Funds (ETF)
For beginners needing tips on how to invest in cannabis, but who are afraid of the risks of investing in single stocks, there are always exchange-traded funds (ETF).
A marijuana ETF is just like any other ETF on the market — a collection of securities in a fund that tracks an index, in this case, one related to the legal marijuana industry.
Investing in the said ETF, like all other investments, comes with its own pros and cons.
One of the biggest advantages is that ETFs provide diversification, an essential strategy in terms of investing in cannabis stocks and the market in general. This means that you can own equity in different cannabis companies that operate in different segments of the marijuana market, from growth and retail to tech solutions.
Another benefit is that someone else will pick the right stock for you. Handpicking or buying single marijuana stocks can be both time-consuming and quite risky, but ETFs are a long-term investment that would make them suitable stocks for beginners and experienced investors.
The risks involved in investing in ETFs are pretty much the same as investing in the marijuana industry: exposure to an unsteady market, lack of regulation, and an uncertain future.
The Best Cannabis ETFs in 2020
- Horizons Marijuana Life Sciences ETF (OTC:HMLSF)
The first ETF to focus on pot, Horizons Marijuana Life Sciences ETF, has holdings in Canadian growers, as well as US-based Charlotte’s Web and Big Pharma company GW Pharmaceuticals. The biggest issue with this fund is its high expense ratio of 0.87%, which is higher than that of other marijuana ETFs. Still, for someone who doesn’t wish to invest in individual marijuana stocks, Horizons Marijuana Life Sciences ETF is a good alternative.
- ETFMG Alternative Harvest ETF (NYSEMKT:MJ)
With stocks from more than 30 marijuana companies and an expense ratio of 0.75%, this fund is an attractive option for investors in 2020, experts say. The best holdings of this fund are Canadian companies that hit a slump last year due to regulation issues, yet should be surpassed in the years to come.
- The Cannabis ETF (THCX)
Another one of the analyst-recommended marijuana stocks to invest in 2020, this ETF is a unique offering. Unlike other funds, it intends to mirror its tracking index, the Innovation Labs Cannabis Index — hence why it is rebalanced monthly (instead of quarterly like other ETFs).
Also, as a passive investment vehicle, it has the lowest expense ratio of 0.7%. Compared to other funds, The Cannabis ETF is mostly focused on CBD and hemp and the majority of its holdings are pharmaceutical and biotech companies.
Learn All About the Risks of Investing in Marijuana
All investments come with a risk and hemp stock is no exception.
The OTC Issue
The biggest hurdle that the cannabis industry faces is legalization on a federal level.
Since marijuana is still illegal in many US states, the majority of American cannabis companies cannot appear on top stock exchanges like NYSE and Nasdaq. Instead, they have to list on the Canadian stock market or choose the option of trading on over-the-counter US exchanges.
Before they invest in marijuana, investors have to be fully aware of the risks involved in buying OTC marijuana stocks.
For one thing, they are not subject to strict regulation, as companies on major stock markets, meaning it is more difficult for investors to assess the actual state of the company (OTC exchanges do not require companies to file regular financial statements and maintain minimum market caps).
The Cannabis Market Is Still a Nascent Industry
It’s too early to tell what will happen to the cannabis industry and investing in marijuana stocks in the future. Like all other industries, the weed market needs time to mature and develop.
Issues with Supply and Demand
Ever since Canada legalized recreational use of marijuana, growers have been rushing to produce as much cannabis as they possibly can to meet the rising demands. Analysts predict that despite the growth in demand, particularly in Europe, where Germany’s medical marijuana market is expected to drive sales, there will be an oversupply of cannabis, which is sure to impact stock prices and the process of investing in weed stocks.
Pick One of the Good Companies to Invest In
What are some of the best marijuana stocks to buy in 2020?
Innovative Industrial Properties (NYSE:IIPR)
This company, which owns and rents property to medical marijuana businesses, currently leases property in 10 states. With a growth rate of 80.9%, according to Zacks, and 90% of taxable income allocated to shareholders as dividends, analysts recommend this company as one of the best hemp stocks to buy in 2020.
If you are looking for tips on how to invest in marijuana in the medical field, you can’t go wrong with Aphria.
One of the largest medical marijuana producers in the world, this Canadian company not only provides pharmaceutical-grade medical cannabis, but it is also one of the rare companies whose sales increased by almost 850% last year, Zacks reports. The company recently acquired a license that will double its production capacity, which is one of the reasons why Aphria has a Zacks Rank #1 (strong buy).
Trulieve Cannabis (OTC:TCNNF)
Another one in the series of the best marijuana companies to invest in, Trulieve Cannabis has reported profit from pot in all four quarters this year. This company grows and sells cannabis products in its own dispensaries across Florida.
So far, it has 40 dispensaries in this state and acquisitions in other states too, which is sure to put its 2020 revenue over the $209 million threshold it made in 2019.
Do Your Due Diligence
Needless to say, you should never put your money blindly into hemp stocks.
Think carefully about how best to invest in marijuana stocks and thoroughly research the company beforehand. But, what does this actually involve?
- Look into the management team — who runs the company and how much experience does the business team have?
- Research the company’s growth strategy, especially its long-term strategy, which is crucial to the survival of a business.
- Compare it to its rivals — how does the company fare against its competition and how does it plan to stand out in the market?
- Look into its financial status and ask yourself: Is it profitable? Is it one of the best marijuana stocks to invest in now? How does it plan to fund operations in the future?
- If you are looking at cannabis growers, make sure to learn all about the all-in cost of sales per gram as well as the cash cost per gram of producing marijuana (which does not include amortization, packaging costs, and inventory adjustments).
- Find out about the company’s distribution channels. It is particularly important to learn whether the company targets local areas or whether it has the capacity to export overseas. You need to understand how to invest in the marijuana industry in the right market. Sure, a bigger market equals more opportunity, but it also increases risks.
- Make sure you check SEC filings or consult a professional to get this information. Press releases usually put a positive spin on the company, and in some cases, you can better gauge the general sentiment towards a stock on social media than by reading the company’s press releases.
Decide on the Amount You Want to Invest
Marijuana stock is not without its risks, so the best pointer on how to invest in weed stocks is to start small.
To be one the safe side, trust the motto to never put in more than you can afford to lose. If your investment plays out, you can always add more shares later on. The alternative is not pretty. What if you go “all-in” on a stock and it goes down? Or if you sell a stock, but later find out it is profitable, would you buy it back at a higher price?
The best option when it comes to how to invest in weed, analysts say, is “trading around the core” or buying small portions when the pot stocks are declining and selling small amounts when stocks are improving. This is a lot of effort, we admit, but if you are willing to put in the work and time, it might just pay off.
Keep a Close Eye on the Changing Market
All markets experience highs and lows, but the cannabis industry is changing more rapidly than others, which makes monitoring marijuana news and cannabis stocks a must.
Be on the lookout for new marijuana companies to invest in, as well as changes to the federal law regarding marijuana legalization, progress with Cannabis 2.0 in Canada, and the growing European market.
Some Bonus Tips
- Establish a timeline for your investment. Decide when you want to sell or buy, which is easier said than done, but it never hurts to have a plan beforehand.
- If you want to invest, but you are still unsure of how to do it right, there are always investment advisory services or companies that will provide you with advice or counsel on how to invest in pot stocks and how to pick the best cannabis stocks.
- If you are more conservative, invest in companies that deal with more than just cannabis. For instance, the core business of Constellation Brands or Scotts Miracle-Gro is not cannabis, which makes investing in these companies less risky.
- In 2020, invest in the CBD. Best CBD oil brands are making a fortune. Also, from CBD extraction-service providers to producers and retailers of hemp-based products, there are plenty of options in terms of marijuana stocks to invest in and CBD companies. It is the opinion of experts that the CBD industry will increase in the new year. According to Forbes, the CBD market is projected to reach $2.1 billion in consumer sales.
When it comes to playing the stock market, there are no guarantees. Trying to profit from pot by investing in stock may not be the safest option, as even some aggressive investors tend to stay away.
Nevertheless, if you play your cards right, take all the necessary precautions and conduct research on how to invest in marijuana the right way, you might just strike gold.