Since 2017, cannabis stocks have been waiting for a major uptick. With the US government’s continued effort to fully legalize marijuana, more companies are looking to capitalize on the budding industry. Additionally, as the number of countries decriminalizing cannabis use and sales increases, the opportunities for existing companies and investors will also grow.
Investing in a new industry can be risky. However, understanding these risks will help you make informed decisions.
The marijuana industry
The cannabis industry has emerged as a multi-million dollar industry flourishing in various sectors such as healthcare and farming. While public companies with high valuations are pursuing the most innovative approach to enter the marijuana industry, established players are looking to acquire companies that can provide ancillary services.
As the legal marijuana industry continues to develop, more investors are becoming aware of the industry’s potential.
A poll conducted in November 2020 by Gallup showed that 68% of adult Americans support the legalization of marijuana. This number was up significantly from the 12% back in 1969.
The increase of cannabis stocks was mainly due to the number of states that have legalized recreational use. This move has led to the creation of the Alternative Harvest ETF. Alternative Harvest ETF is the first cannabis ETF registered in the United States. This ETF tracks indexes of companies in the legal business of growing, selling, and marketing marijuana products for medical and recreational use.
How will the marijuana industry evolve?
With the explosion of marijuana products, experts are now asking what the industry might look like in the future. Will large corporations dominate and overflow the market with generic products?
Ryan Stoa, a law professor at Concordia University, said this would be difficult due to the variety of strains and the fact that consumers may demand locally-made or locally-produced products. On the size of the regulators, he noted that states have a role to play. For instance, California has a cap on the number of marijuana farms allowed in the state.
Technology is also a significant factor. For example, Eaze, a marijuana delivery company, has raised over $35 million in funding. It’s also creating a platform to ship CBD products to 41 states.
In addition, Dutchie, a marijuana-delivery service, raised $3 million in 2018 from Snoop Dogg and Kevin Durant’s companies. We can expect to hear more about blockchain and machine learning concerning marijuana.
Other notable tech companies in the industry include MTrac – a startup that aims to solve the banking problems of the sector, and Bloom Automation – a company making robots that will process and trim cannabis.
Two types of marijuana products
There are two types of marijuana products: medical marijuana and recreational marijuana. Medical marijuana is used for treating various medical conditions. It is legal in 35 states and the District of Columbia. Also, in more than 30 countries globally.
Patients often require a doctor’s recommendation to obtain a medical marijuana prescription. This substance treats adults with conditions such as anxiety, pain, stress, and depression.
On the other hand, nineteen states in the US have legalized recreational marijuana for adults. In addition, other countries, including Canada and Mexico, have also allowed the recreational use of the drug.
Three types of marijuana companies
There are three different types of marijuana companies: Cannabis growers and retailers, Cannabis-focused biotechnology companies, and Ancillary product and service providers.
Cannabis growers and retailers operate by cultivating and distributing the finished products of their growing operations. Many of these establishments operate in indoor facilities and grow the crops for the products. Some also sell their products at retail stores.
Cannabis-focused biotechnology companies are actively extracting cannabinoids from the plant to create new drugs for medical use.
Non-plant-touching businesses support the marijuana industry by supplying ancillary products and services. These companies include manufacturers, distributors, and retailers of ancillary equipment and supplies.
Experts generally advise taking a long view when it comes to investing in cannabis stocks as the dynamics of the marijuana industry are rapidly changing. Investors in the industry should closely monitor their stocks and exchange-traded funds (ETFs). Some changes may be beneficial, as the additional loosening of the US marijuana laws, while others can be devastating.
Investing in cannabis stocks
New York State has officially legalized the recreational use of marijuana. The state also decriminalized the possession of small amounts in March 2021. Aside from New York, some other US states and territories have also allowed marijuana to a certain extent – like Alaska and Arizona.
With the Democratic Party in the White House, the government’s approach toward the marijuana industry is expected to become more favorable, which could positively affect the financials of the industry and cannabis companies.
The legal marijuana market was expected to reach over $41.5 billion by 2025. According to New Frontier, the market is already growing at a fast pace.
Green Acre Capital, a private US cannabis investment firm, has stated that the industry in the US could be worth $95 billion in the long run. Both Canada and the US are leading players in the cannabis industry. Both countries’ companies have shown robust growth in the past couple of years.
Among the Canadian competitors in the marijuana industry, Canopy Growth Corporation and Tilray, Inc. posted sales growth of over 50% in 2020. However, according to a report by the Wall Street Journal, US companies are more likely to outperform their Canadian counterparts due to the rapid growth of the marijuana market in the country.
Future potential for investing in cannabis stocks
As the US prepares to enact more liberalized regulations for the recreational use of marijuana, many believe that its growth will continue. For example, according to a couple of experts, the state of New York could face annual gains of $300 million in annualized tax revenue.
Curaleaf Holdings, a US-based company that operates in the cannabis industry, reported that it had raised over $200 million in fresh capital in January 2021. The presence of companies such as Altria Group, Inc., Curaleaf Holdings, Inc, and Tilray, Inc in the marijuana industry is an encouragement for the industry’s growth prediction.
Investing in medical cannabis stocks
The basic framework for assessing medical cannabis stocks remains the same as for other products in the pharmaceutical industry. Accordingly, investors should focus on the company’s pipeline and drug development program.
Because research in the industry is relatively new, analysts expect investors to have a longer return on investment than recreational marijuana. For over 19 years, GW Pharmaceuticals has been studying the effects of cannabinoids on humans. The FDA approved the company’s first drug, Epidiolex, in 2018. Its purpose is to treat epilepsy.
Despite the FDA’s approval of medical marijuana, the agency still refers to this drug as a controlled substance.
Getting into the medical marijuana market is as easy as getting into any other industry. There are many companies out there that specialize in this field or conducting researches. Many of these are listed on the Toronto Stock Exchange. There are also over-the-counter markets that trade cannabis stocks, as well as ETFs.
Investing in recreational cannabis stocks
Analysts expect this segment to grow significantly in size over the next couple of years due to its increasing audience. The rising number of companies involved in this field can also reflect this.
The recreational marijuana industry mainly uses tetrahydrocannabinol, a psychoactive substance that causes the feeling of high after smoking marijuana. This industry also uses THC for products such as coffee, cigarettes, and beer with marijuana extract. The recreational cannabis industry is different from the medical marijuana industry. Instead of smoking marijuana to treat a specific medical condition, recreational users consume it for personal enjoyment.
Just like medical marijuana, stocks and other investments in the recreational marijuana industry are available. Canopy Growth is a leading player in the space. Canopy Growth Corp (TSE:WEED) reported annual revenue of $398.77 million in 2020.
Impact of COVID-19 on cannabis stocks/industry
When it comes to the cannabis industry, Covid-19 has been good for demand, but it has also been bad for regulation. Since the pandemic has caused many people to experience prolonged periods of fear and anxiety, many have turned to marijuana for relief.
In North America, sales of cannabis shot up significantly in 2020. In Canada, half of all users surveyed said they increased their consumption during the Covid-19 launch.
When the pandemic started, many marijuana dispensaries in North America closed down.
Investors feared that the closures would cause them to lose money. Instead, the industry recovered quickly after Canada and the US introduced the regulatory approach. Cannabis came across as a lucrative business opportunity, which caused sales to spike and companies to innovate.
The pandemic has accelerated many of the changes in the business, from digital payments to e-commerce. It also evolved the way farming is practiced. Due to the ease of ordering online, medical marijuana has ridden the Covid e-commerce wave.
According to Nasdaq, most cannabis companies have been very active in terms of securing high-profile partners and increasing their businesses.
Not every area of the cannabis industry have reaped benefits
Before Covid-19, the cannabis industry was already attracting foreign direct investments.
Covid-19 has been winding down the operations. It is harder to do international transactions without being able to travel. For example, Greenfield FDI was hit hard, as their business involves creating new operations overseas.
The impact of Covid-19 began to show in the first three months of 2020, with data indicating that the overall deal size started to decrease amid uncertainties in the economic climate. Before Covid, the median deal size was typically around $4m. Since then, the median deal size has halved to about $2m.
The US has the biggest legal marijuana industry in the world. The industry has created over 243,700 full-time jobs in the past couple of years. Despite its label as an illegal substance, the marijuana industry expects to generate thousands of new jobs in the coming years.
Although the industry has grown, the federal environment has not moved as much since the pandemic. The changes to the legislature would have been arguably faster if there had been no pandemic.
The volatility of cannabis stocks
The worldwide adoption of recreational marijuana seems to be growing. In the US, more states are moving to allow both recreational and medicinal use of marijuana. On the other hand, in countries like Canada and Uruguay, recreational marijuana use is already legal. Furthermore, Mexico’s parliament approved the use of marijuana in all forms on March 4, 2020. With signs that the US may soon allow recreational marijuana use, North America looks like an excellent candidate to become a global leader in this emerging industry.
According to a research firm, the global marijuana market will reach a total of $74 billion by 2027.
Reasons for not investing in cannabis stocks
Despite all the hype, there are still reasons to be cautious when investing in legal marijuana.
Federal legalization is not guaranteed. Not every US state will necessarily allow marijuana legalization. That means that companies operating in different states have to comply with different regulations.
The debate over the taxation of marijuana has garnered considerable attention. Of course, it would be beneficial for states that have legalized the drug to collect taxes. But, on the other hand, if the taxes are high, or if the balance is missing, then the demand for marijuana would decrease, which could harm the prices and sales.
Many of the leading marijuana companies in the world have enjoyed the benefits of high valuations. However, it’s important to remember that these valuations are often based on market hype. Due to the nature of the marijuana industry’s development, it is not yet clear when the market will settle down. Therefore, the investors should try not to get carried away with the hype as the valuations might eventually drop.
Many companies are competing for dominance in this budding industry. However, the sector is still in its infancy. As a result, many of these companies will most likely not grow into major market players. Others will probably close their doors due to the pressure of the market.
Some cannabis stocks are riskier than others, and predicting which companies will perform well can be challenging. Due to the volatility of cannabis stocks, investors must take the time to research the industry thoroughly before making any investment decisions. Despite this, many people still see tremendous opportunities in the industry.
The question that remains to be answered is whether the rewards are worth the risks.
Investing in cannabis ETFs
Investors may be asking themselves if they should start investing in marijuana ETFs now or wait for the market to develop further.
Marijuana ETFs are the same as traditional ones. They follow a basket of names related to the legal marijuana industry. For example, New Jersey-based fund manager, ETF Managers Group, launched an exchange-traded fund for the emerging AgroSphere ETF in February 2017. Then, in March, Horizons ETFs announced that they would list their medical marijuana life sciences index on the Toronto stock exchange.
Many marijuana ETFs have been unsuccessful due to various factors, such as regulation and banks’ reluctance to support them. Some of the concerns are around the custodian structure of ETFs and the bank holding the assets.
In 2015, another cannabis-focused exchange-traded fund called the ETFMG Alt Harvest ETF was launched.
How to invest in cannabis ETFs?
When investing in marijuana ETFs, investors typically face a limited number of options. One of the options is the Horizons Medical Marijuana Lifesciences ETF, which tracks the movement of cannabis stocks in Canada. This ETF also contains some American companies. US investors wanting to buy into this ETF would need to work with a Canadian financial intermediary to do so.
Most investors have a big question about marijuana ETFs: Are they worth the time and trouble? Despite a strong performance, they are still facing a troubled future. With banks refusing to take on the legal and reputation risks of investing in an industry that is not yet legal at the national level, many marijuana ETFs will likely fail to take off. Moreover, even those who succeed in launching an IPO will likely experience a rocky road due to the intense negotiations with regulators and custodian institutions that usually follow.
Conclusion on ETFs
As the marijuana industry continues to grow, many worry about the future of the stocks. For now, it is difficult to predict what the future holds. Despite the optimism surrounding the potential of the space, many investors are still not ready to fully embrace cannabis ETFs in a rapidly changing environment.
It’s not yet clear when the US’ legal recreational marijuana industry will take off.
Best cannabis stocks to invest in
Here is an overview of the prominent cannabis companies on the market.
Tilray is a Canadian-based company that is focused on the development of pharmaceutical and cannabis-based products. It has operations in the US, Australia, Canada, Portugal, Germany, and Latin America.
In December 2020, the company merged with Aphria. The resulting company was to be known as Tilray and to remain using Tilray stock market symbol TLRY. Tilray was originally founded in 2014 by Privateer Holdings, a Seattle-based firm.
In September 2018, Canada’s largest medical marijuana company, Tilray, became the first company to export its product to the US. Later on, in December 2018, it signed a deal with the healthcare company Novartis to distribute and sell its non-smokable and non-combustible medical cannabis in legal markets worldwide.
In July 2018, Tilray was the first cannabis company to list on a major US exchange. Its price initially reached $17 per share, then increased to $214 per share in September 2018, and then fell to $29 per share in August 2019. In 2018, the company entered into an alliance with Sandoz, a subsidiary of Novartis, to develop and distribute non-combustible medical cannabis products in international markets.
In 2018, marijuana company Tilray announced that it has partnered with AbInBev, the world’s largest brewer, to research and develop non-alcohol THC and CBD-infused beverages. Afterward, in February 2019, Canadian marijuana company Tilray purchased Manitoba Harvest, a leading producer of hemp-based food and beverages. In 2019, Tilray made an acquisition of a facility in Ontario, Canada, from Natura Naturals. The acquisition doubled the company’s cultivation capabilities in the country.
In July 2019, the company acquired Smith & Sinclair, which is a U.K.-based producer of CBD-infused edibles. A month later, Tilray bought Four20, a cannabis retailer from Alberta. On December 15, 2020, Aphria, through its reverse acquisition of Tilray, became the world’s largest multi-national cannabis company. The company’s CEO stated that the merger would allow Aphria to capture Tilray’s exposure in the US and Europe.
Irwin became the CEO of the merged company, while Brendan Kennedy (Tilray CEO) became a member of the board of directors. The companies kept Tilray name and stock market symbol.
The University of British Columbia and a pharmaceutical company partnered to develop a clinical trial that tested the efficacy and safety of medical marijuana for treating PTSD. In Spain, the company provided equipment and services to conduct a study that tested the use of medical marijuana for treating glioblastoma.
In August 2019, the company announced that it has partnered with the New York University to study the use of CBD to treat PTSD and alcohol use disorder.
Company website: https://www.tilray.com/
Canopy Growth Corporation is a marijuana company founded in Ontario by Chuck Rifici and Bruce Linton. Formerly known as Tweed Marijuana Inc, the company was renamed after a merger with Bedrocan Canada in 2015. Mark Zekulin was named the sole CEO in July 2019, but he resigned in December the same year after a new CEO was named.
Canopy was the world’s biggest marijuana company by April 2019. At that time, Constellation Brands owned over 35% of the company. In 2019, its stock price dropped by about 32%. Canopy Growth was the first licensed and publicly-traded cannabis producer in North America, listed on the Toronto Stock Exchange with the symbol WEED.
It started trading as CGC on the New York Stock Exchange on May 24, 2018. In the provinces where the private sector can sell cannabis, Canopy Growth has opened stores through its subsidiary Tweed Inc. In 2018, Canopy Growth funded professorships in Cannabis Science at the UBC in Vancouver. By October the same year, the company’s market cap had reached over US$14 billion.
Canopy Growth has several key relationships with other companies, including a partnership with a pharmaceutical company in Spain and a venture with a medical marijuana company in Germany.
Company website: http://www.canopygrowth.com/
Aurora Cannabis is a licensed Canadian producer of marijuana. The company has a listing on Nasdaq and Toronto Stock Exchange with the symbol ACB. As of September 2018, it has eight production facilities, five retail sales licenses, and operations in 25 countries.
Aurora is the second-largest producer of cannabis globally (after Canopy Growth), with a funded capacity of approximately 625,000 kilograms annually. After a successful 2018, the company reduced expenses during the second half of 2019 due to the low sales of recreational cannabis in Canada. Later on, Terry Booth, the chief executive, and co-founder resigned in February 2020. His replacement as an interim CEO was Executive Chairman Michael Singer.
Aurora’s shares rose after a certain report revealed that the two companies are studying the market for the distribution of alcoholic drinks.
Afterward, Aurora and Coke revealed they had no solid plans to distribute such beverages but merely studied the market. Nevertheless, after the report, Aurora’s shares increased, and the company’s market capitalization reached $10.71 billion in September 2018.
In September 2020, Aurora Cannabis namely lost over C$3 billion in its fiscal year. The company’s focus on premium cannabis has caused the loss as premium cannabis got too expensive for consumers. The company’s shares plummeted by 10 percent as a consequence.
The company was founded in 2013 and currently employs up to 5000 people.
Company website: https://www.auroramj.com/
Innovative Industrial Properties
Innovative Industrial Properties is a leading player in the cannabis industry. Medical marijuana companies often have to sell their real estate to fund their operations. IIP purchases their cultivating joints and leases the land back.
IIP is a real estate investment trust that develops a vertically complex medical marijuana production facilities network. This company is the only type of real estate investment trust actively pursuing this type of venture. While the company could benefit from the changes that would come with the legalization of marijuana in the US, there are also some factors that investors should be aware of.
The company’s strategy
The company’s model is simple: IIP acquires properties currently used as marijuana cultivation facilities and then leases them back to their former owners. This strategy is very different from other forms of leasing as it reduces the chances of seeing the properties get vacant.
IIP’s assets were fully rented out as of July 6. That means that investors can expect the company to continue operating at 100% capacity for the foreseeable future.
Due to the US’ ban on cannabis, many companies can’t get financing through traditional banking channels. This IIP offers its tenants access to capital through the buyout. However, it remains unclear if IIP will still be able to get new tenants or renegotiate existing ones if the recreational use of marijuana becomes legal in the country.
The stock is traded on the New York stock exchange with the symbol IIPR.
Company Website: https://innovativeindustrialproperties.com/
Green Thumb Industries
Green Thumb Industries is a multistate cannabis operator in the US with a mission to grow green for good. GTI is a unique player in the US marijuana market as it owns multiple growing facilities and dispensary locations.
GTI has a strong presence in 14 states with over 60 stores. These stores are strategically located to enable them to distribute the brands across the East Coast.
GTI is a multi-brand company that consists of various brands such as Dogwalkers, Beboe, Rythm, and Dr. Solomon’s. With a well-diversified product portfolio, GTI is well-positioned to capitalize on the fast-growing legal cannabis market.
The company was founded in 2014 and currently employs up to 5 000 people. It is listed on the Canadian Securities Exchange with the symbol GTII.
Company Website: https://www.gtigrows.com/
GrowGeneration is a leading distributor of hydroponics equipment and supplies for the cannabis industry. With a focus on supplying high-quality equipment and supplies for the medical marijuana industry, GrowGeneration is different from other retailers. In addition, their specialized approach allows them to offer a wider variety of products.
Grand View Research projects the global marijuana market to grow at a 27% compound annual growth rate through 2028. This growth might fuel the expansion of the industry’s smallest operator, GrowGeneration. Despite its small size, the company plans to open more stores in the next couple of years. Their current plan is to open 100 stores by 2023.
The company has also evolved beyond just a retailer. GrowGeneration focuses on creating value through its private-label products as well. In December 2020, the company purchased Canopy Crop Management, a producer of soil enrichment products. As a result, canopy Crop Management became a part of GrowGeneration’s company portfolio.
In March 2021, GrowGeneration went on to purchase Char Coir, a company that produces coco-based products made from renewable resources. These products can be used for sustainably growing crops. Private-label products contribute a significant portion of the company’s sales. In addition, since the company has a massive e-commerce platform, it can sell many of its products in areas where it has no stores.
Company Website: https://www.growgeneration.com/
Trulieve is the first organization in Florida to provide Medical Marijuana Dispensaries. They grow plants in an environment that’s free from pests and chemicals. The company was founded in 2016 and currently employs up to 5 000 people. They are listed on Canadian Securities Exchange with the symbol TRUL.
In October 2021, Trulieve completed the acquisition of Harvest Health. Through this purchase, Trulieve made a step towards becoming the most profitable and largest legal cannabis operator in the United States and possibly the world. Trulieve now owns 3 million square feet of cultivation capacity and 140 stores in the United States with the acquisition completed. In addition, the company has started the rebranding process of Harvest Health stores.
Company Website: https://www.trulieve.com/
Jazz Pharmaceuticals plc
Jazz Pharmaceuticals is a biopharmaceutical company focusing on developing products that will improve the lives of people with serious diseases. Through the transformative power of biopharmaceutical discoveries, they drive change in the way people use medicines globally.
Jazz Pharmaceuticals is a pharmaceutical company with headquarters in Ireland and manufacturing facilities in Italy and Ireland. The company’s PLC (JAZZ) has a strong valuation score of 82 by InvestorsObserver.com.
The company originated in 2003 through a merger of Jazz Pharmaceuticals Inc and Azur Pharma plc. One of their most significant products is the drug Xyrem.
The investors can trade the stock (JAZZ) on the Nasdaq stock exchange.
Company Website: https://www.jazzpharma.com/
The company is famous for its consumer lawn and garden products. It is a household name in the US, and it has been in business since 1868. Its market cap is around $9 billion.
The Scotts Miracle-Gro Company’s Hawthorne unit is becoming a leading supplier of medical marijuana to the industry.
During the company’s recent earnings call, Jim Hagedorn, the CEO of Scotts Miracle-Gro, said that the industry is “clearly showing potential for significant growth.”
The company employs up to 10 000 people and is listed on the New York stock exchange with the symbol SMG.
Company Website: https://scottsmiraclegro.com/
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This article was last updated on November 30th, 2021.