How to Invest in Marijuana Stocks – The Motley Fool

Global marijuana markets are forgiving the pun, growing like a weed. Worldwide spending on cannabis reached $ 9.5 billion in 2017, according to ArcView Market Research and BDS Analytics. The total is projected to increase to $ 32 billion by 2022, with a compound annual growth rate (CAGR) of 27.5%.

With this type of impressive growth, it is no wonder that many investors are interested in investing in publicly traded cannabis stocks. What's the best approach for marijuana investing? There are seven key steps:

1. Understand the types of marijuana products
2. Know the different types of marijuana stocks
3. Understand the risks of investing in marijuana stocks
4. Know what to look for in marijuana stock
5. Evaluate the top marijuana stocks and exchange-traded funds (ETFs)
6. Invest carefully
7. Monitor changing industry dynamics closely

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

1. Understand the types of marijuana products

There are two broad categories of cannabis products: medical marijuana and recreational marijuana. These two categories are several specific types of products.

Medical marijuana is currently widely available in 30 U.S. states and in several countries across the world, including Canada and Germany. A prescription from an authorized healthcare provider is typically required for patients to obtain medical marijuana. It's frequently prescribed for anxiety, depression, bread, and stress.

Medical marijuana, also referred to as medical cannabis, can be inhaled by smoking or dried flower or vaping concentrates. It can be consumed via edible products that contain marijuana or cannabis-infused beverages. There are even topical creams and lotions containing marijuana or chemical ingredients from cannabis.

One of the most commonly used medical marijuana products is cannabidiol (CBD). CBD is one of many chemicals in cannabis plant known as cannabinoids. It does not have the psychoactive properties of another important cannabinoid, delta-9 tetrahydrocannabinol (THC), but appears to claim several potential health benefits. In June 2018, the U.S. Food and Drug Administration (FDA) approved the first CBD-based drug, Epidiolex, for treating two rare forms of epilepsy, Dravet syndrome and Lennox-Gastaut syndrome (LGS).

The FDA has three THC-based drugs – Marinol, Cesamet, and Syndros – for the treatment of chemotherapy-induced nausea and vomiting. Marinol and Synders also for AIDS-related anorexia. However, all three drugs are manufactured using synthetic THC rather than compounds from marijuana plants.

Recreational marijuana is currently approved for use in U.S. states and the District of Columbia. Uruguay is legalized at the national level in 2013. The Canadian parliament is in the process of becoming a member of the Canadian Marijuana.

As you might expect, users of recreational marijuana tend to prefer the psychoactive attributes of THC. Smoking cannabis is the most common method of use in the United States. However, vaping concentrates and consuming cannabis edibles has grown in popularity.

2. Know the different types of marijuana stocks

There are different types of marijuana products, there are also different types of marijuana stocks. The three primary types of pot stocks are:

• Marijuana growers – These companies, which include Canopy Growth and many others, marijuana growers (often in indoor facilities and greenhouses), harvesting crops, and distributing marijuana.
• Cannabis-focused biotechs – These are biotechs (such as GW Pharmaceuticals) that focus heavily on developing 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 with some degree of risk. However, investing in marijuana stocks has several risks that you should understand.

Legal and political

Probably the most important risk is that the marijuana remains illegal at the federal level in the US This means that there is a danger that the US Department of Justice could have a problem with marijuana for medical or recreational purposes.

This risk was underscored in January 2018 when U.S. Attorney General Jeff Sessions rescinded Obama's administration policies that largely restrained the federal government from intervening in states that had legalized marijuana. These Obama-era policies included the Cole memo, which instructed federal attorneys to defer to state and local authorities in most cases when it came to prosecuting marijuana-related activities.

Since then, President Trump has said that he would support legislative efforts spearheaded by Sen. Cory Gardner (R.-Colo), where they allow them to practice marijuana, to allow them to enforce their own marijuana laws without fear of federal intervention. However, there is no guarantee that this legislation will become law.

In addition, current U.S. federal law places severe restrictions on banks and financial institutions that deal with marijuana-related businesses. As a result, it can be difficult for many businesses to raise capital through borrowing, or even have checking accounts.

Supply / demand imbalances

Many pot stocks have sky-high valuations (what is the market thinks the company is worth) based on expectations of tremendous growth over the next few years. But there is a clear-and-present danger to achieving those growth expectations: the likelihood of a big supply glut, particularly in Canada.

Most, if not all, of marijuana growers in Canada have made major expansion initiatives to increase production capacity. While in the first year of life, it is expected that the situation will be legal, the situation will not be last indefinitely. A supply glut is almost inevitably on the way in the country.

What would a supply glut mean for marijuana growers? When supplying outstrip demand, prices usually fall. Marijuana growers could find their income in this scenario. These decreases would likely result in these companies falling, as well.

The good news is that the global demand for marijuana is expected to increase significantly. Germany's medical marijuana is a key source of this growth because of the country's legalized medical marijuana and has the largest population in the European Union. Other countries with large populations that have legalized medical cannabis, such as the United Kingdom, may also require higher demand.

The bad news, though, is that it's quite possible that the growth in marijuana growers will grow. That would mean that Canadian pot growers would still face the supply-glut scenario, which would likely cause their stock prices to drop.

Over-the-counter (OTC) stocks

Investors also should be aware of the risks associated with buying over-the-counter (OTC) marijuana stocks. Companies that are listed on major stock exchanges, which are the New York Stock Exchange (NYSE) and the Nasdaq, the minimum value of outstanding shares. ). These situations can not be solved unless the market-cap is in place. OTC stocks do not meet these requirements.

The problem is that many marijuana stocks are only available through OTC trading rather than through major stock exchanges. It should be noted, however, that several stocks are only available in the United States, but that they do not have a market share.

4. Know what to look for in marijuana stock

Treat marijuana stocks like any other stock you'd consider buying. Research the management team, review the company's growth strategy and competitive position, and check out the company's financial status. If the business is not profitable yet, you'll want to make the company's cash position, which includes cash, cash equivalents, and short-term investments. If it is not, the company could have made additional financial contributions to the stock market.

There are unique factors for marijuana industry that you should also look into for certain stocks. For stocks of marijuana growers, find out about their "all in" cost of sales by gram and their cash cost per gram for cannabis production. The "all in" cost of sales by gram, cost of gram excludes amortization, packaging costs, and inventory adjustments. Companies will be in the future when supply exceeds demand.

Because it is not possible to reach Canada in the future, checking out the international operations of Canadian marijuana growers is also a cautious move. Companies that already have distribution agreements and operations in Germany and other countries that do not.

In addition, research how many warrants and convertible securities have been issued by the company. Warrants give investors an option to buy shares in the future. Convertible securities may be converted into the future into shares of common stock. For example, convertible debentures start off as loans. A high number of gold warrants convertible securities could mean that the stock will be diluted in the future. Some marijuana growers have used these methods of raising cash extensively.

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 exchanged-traded funds (ETFs). Below is a list of top marijuana stocks and ETFs to consider. Note that this list is not comprehensive and only includes marijuana stocks with a market cap of at least $ 200 million.

* Reflects net assets. All data as of Aug. 6, 2018. Data source: Yahoo! Finance.

I'll highlight one stock (or ETF) from each category that I think warrants special consideration.

Canopy Growth

Canopy Growth is the biggest marijuana in terms of market cap. The company has an experienced management team and a huge production capacity, with 10 facilities together claiming more than 2.4 million square feet of growing space. Although they have not yet been reported, they have been very competitive, and reported that they have "increased their scale".

Cannabis already has marijuana supply agreements with Canadian provinces and one territory. It's also one of the best-growing marijuana growers in international markets. In particular, the company has a strong foothold in the German medical marijuana market. Canopy currently operating in nine countries, including Canada, spanning five continents.

What really separates Canopy Growth from its peers is the company's relationship with major alcoholic beverage maker Constellation Brands. Constellation recently invested $ 4 billion in Canopy and the company's exclusive global cannabis partner.

Canopy Growth is not profitable yet because it is widely used in expansion efforts. The big investment by Canopy Constellation gives a huge cash stockpile to expand even more into new markets.

GW Pharmaceuticals

GW Pharmaceuticals is the first biotech to win FDA approval for a marijuana plant-based drug – Epidiolex. The company operates under the US Drug Enforcement Administration (DEA) under federally controlled substance regulations. GW expects to launch Epidiolex in the U.S. by early fall.

Market-research firm EvaluatePharma predicts that Epidiolex will become one of the top 10 new drug launches of 2018. Opinions vary about just how successful the cannabinoid drug will actually be, but I think $ 1 billion is possible.

Most of the company's executives have at least two decades of experience in the pharmaceutical industry. They're familiar with launching new products, including GW's multiple sclerosis drug Sativex, which is approved in more than 25 countries outside the US

GW Pharmaceuticals is not profitable at this point. However, the company reported cash and cash equivalents totaling more than $ 440 million as of the end of June 2018. That's enough to fund operations at least through 2020 while Epidiolex sales grow.

Scotts Miracle-Gro

My favorite among the ancillary providers to the marijuana industry is Scotts Miracle-Gro. The company is the leading provider of hydroponics products to cannabis growers. Although the stock has struggled in 2018, I am thinking about Scotts as California is a better time to take care of marijuana.

Scotts is led by a veteran team including Jim Hagedorn, who has been CEO since 2001. The company is not only profitable, it has a dividend currently yielding 2.9%. Scotts' debt of nearly $ 2.3 billion is higher than I'd like. However, the company borrows primarily to its expansion efforts – a good thing, in my view – and is committed to reducing its debt.

It's also important to know that Scotts Miracle-Gro is not just focused on the marijuana market. Over 90% of the company's income from sales of lawn and garden products. I think there is a long time in that area for Scotts, as well.

Horizons Marijuana Life Sciences ETF

Between the two marijuana ETFs included on the table, my preference is the Horizons Marijuana Life Sciences ETF. It's the largest of the two ETFs, and all of them are in the top 10 holdings of this ETF and combine to make up nearly 30% of the fund's total assets.

One knock against the ETF Marijuana Horizons, however, is that its expense ratio of 0.94% is really high compared to many other ETFs. It's even higher than the 0.79% expense ratio of the ETFMG Alternative Harvest ETF. Also, because of the risks discussed earlier, I think they are better off buying individual stocks rather than buying marijuana ETF that also holds weaker stocks.

6. Invest carefully

What exactly does "invest carefully" in marijuana stocks mean? For some investors, the best approach will be to avoid marijuana stocks entirely. These stocks are not a good fit for conservative investors. Only the most aggressive investors who can tolerate high levels of risk should jump in.

Even aggressive investors should only buy marijuana stock after completing the previous five steps. Marijuana stocks are both risky and highly volatile. Putting too much of your investment in any stock marijuana gold ETF is not wise.

You might want to consider starting with a small position in a marijuana stock. As the cannabis market grows and a company increases your earnings and your decision to buy, you could add to your position. If you are growing up, you should re-evaluate your assumptions.

Also, some marijuana stocks are arguably safer than others. For example, Scotts Miracle-Gro makes most of its revenue outside of the cannabis industry. The company has been selling lawn and garden products for a long time and does not face some of the risks associated with it. Scotts to a more pure-play Marijuana stock like Canopy Growth.

7. Monitor changing industry dynamics closely

Investors are better off taking a long-term view when buying stocks. That being said, the dynamics in the marijuana industry are rapidly changing. The criteria used in making a decision could be dramatically different in the future.

Because of this, I recommend that investors monitor any marijuana stocks or ETFs that they buy, along with the overall industry itself, very closely and frequently. Some changes could be beneficial – for example, potential relaxation of U.S. federal marijuana laws. Other changes, however, could be bad news, such as the possibility that Germany places restrictions on its medical marijuana market.

Tremendous growth should be in store for the global marijuana industry. That growth might not be as good as it would be, though. Following these seven steps can help you navigate this exciting and challenging opportunity.