Whether it’s the estimates putting the cannabis market somewhere around $150 billion in the next 6 years, the legalization of recreational weed in Canada this past October, or a legalization movement in the USA with so much momentum that it’s even got Indiana legislators talking about regulation, there are a lot of reasons to consider investing your money in pot.
It’s an exciting idea to contemplate, but it’s not a simple choice to make. If you’ve been watching cannabis stocks, which have soared to unbelievable heights and fallen to hope quenching lows, ambiguity is the clearest thing about investing in weed. Should this volatility disqualify cannabis companies from your consideration? Not necessarily. Here are a few questions you can ask before making an investment decision about a cannabis company.
How Legal Is It?
While cannabis legalization has become a globally popular idea, it remains largely prohibited. This is an especially strange quagmire in the United States, where weed has been legalized in over half of the country’s states while remaining illegal at the national level. Consequently, the first thing a prospective investor should consider is a company’s location and just how legal their business is in that space. While a cannabis company in Colorado may be legally operating according to state law, it will be, until federal law changes, subject to federal prosecution.
That risk doesn’t apply equally to all businesses in the industry, though. It certainly applies to plant-touching companies—those that deal directly with plant material (producers, processors, manufacturers, distributors, etc.). But it’s not quite so scary for ancillary businesses, or businesses that support the heart of the cannabis industry without ever touching the plant directly (think cultivation products, consultants, packaging companies, marketing agencies, security, media, etc.).
Scotts Miracle-Gro, for example, has seen growths in its share prices because of the household name’s subsidiary, Hawthorne Gardening. Hawthorne specializes in hydroponics, a water-based cultivation method pervasive in the cannabis cultivation side of the industry. The company’s growth is directly related to its utility in the cannabis space.
If dealing with the partial legality of cannabis in the United States is too risky for you, you can consider investing in one of the largest Canadian brands in the stock market: Auxly, Aphria Inc., Aurora Cannabis Inc., Cronos Group Inc., Canopy Growth Corp., or Tilray Inc. However, it’s important to keep in mind that Canada’s recently implemented recreational laws don’t necessarily mean that investing in these companies is risk-free. More on that later.
What Part of the Market Does it Serve?
The passage of recreational laws might make the biggest headlines, but when it comes to investment, medical marijuana is probably the safer bet. For one, the majority of states in the USA that have legalized weed have done so for medical use. People are more willing to support legalizing a conventionally disparaged drug in the name of medicine than in the name of having a good time. Even one of Trump’s OG’s, Sean Spicer (remember that guy?), said that there was a difference between medical and recreational weed in a way that implied the former was justifiable.
In addition to these social reasons, there is also the fact that medical marijuana regulatory frameworks predate all recreational ones. In many cases, this means that medical companies will be poised to fill in gaps that new recreational companies may not be prepared for. That’s exactly what’s happening in Canada, where the only companies making a profit in the wake of recreational regulation were medical companies to begin with.
If you are more comfortable with risk, investing in recreational companies isn’t a bad idea. Realistically, the recreational market will subsume the medical one over time. In the US, states that have legalized cannabis for personal use have seen recreational sales balloon past medical ones. But because of prohibition in most of the world and the complications that come with a newly regulated industry, you may just have to exercise your patience a bit longer.
If You Want to Invest in a Producer, How Much Weed Can it Grow and at What Cost?
As you’re vetting cannabis producers to invest in, consider the square footage each company has dedicated to cultivation—history shows that states and countries that legalize cannabis for recreational use see a product shortage in the early months and even years of sales, so the more cultivation capacity a company has, the better. It’s also important to note how much producers are growing versus how much they have sold. Finally, you want to invest in a company that has low growing costs. Cannabis is an energy-intensive plant, so the more efficient and sustainable the producer can be, the more money you stand to make by investing in it.
Canada’s largest publicly traded cannabis companies (Aphria, Aurora Cannabis, Cronos, Canopy Growth, and Tilray) are producers, and they all share a similar problem: profit loss. While these companies have raised huge funds and dominate the global cannabis industry, they are spending more than they are making.
Aurora Cannabis saw its top line grow by 260 percent but lost a net of $18.7 million in the third quarter. Canopy Growth grew by 33 percent but lost a net of $330.6 million. This doesn’t mean that these companies are in danger of going out of business, but it does mean that market value does not necessarily reflect the bottom line, especially as the industry works to adjust to the market and new laws.
What Intellectual Property Does it Own?
Because cannabis has been underground for so long, there are a lot of patents up for grabs. From producing to manufacturing, cannabis companies are developing and patenting their own processes with the hopes of making a large profit off the companies that license those methods. Look for companies that own intellectual property because they are likely to see boosts in their valuation.
One final piece of advice: be patient. Legal and regulatory hurdles are going to take years to resolve, and that means that even the most promising companies may struggle to make the profits you’re hoping for. That doesn’t mean that the cannabis industry isn’t a smart place to invest—experts predict that it will be a $146 billion dollar global market by 2025. What it does mean, however, is that waiting a little longer to invest may not be the worst idea. And if you’re already invested, don’t be totally discouraged by the volatility of cannabis stocks. Stay vigilant and make strategic decisions and you might walk away with some—or a lot of—extra cash.