Weed may sound like a sure bet, but it’s already a saturated market…
So how should retail investors approach pot stocks?
2020 wasn’t all fire, brimstone, and coronavirus. The year closed out with some big winners on the public stock exchanges, including several upstart champs in a federally outlawed industry: Marijuana.
Yet cannabis stocks may soon blaze hotter than they are now. The 2020 elections saw Democrats Blue Wave their way into Congress and the White House. And even though conservatives dominate the Supreme Court 6-3, every sitting justice, regardless of political leaning, supports big business.
Weed may be federally illegal, but you can legally invest in it. The first pot stock was listed on Nasdaq in 2018. Today, there are dozens.
Globally, regulated and illicit cannabis together is worth an estimated $340 billion. Cannabis consumption spiked 60% over the past decade. So there’s definitely money to be made here. If you’ve got some coin to drop on cannabis stocks, you may be wondering where to start.
Which companies show the most promise? Which companies are bad bets? How should you diversify your portfolio? Whether you’re a seasoned investment vet, new to cannabis investing, or just new to investing in general, this guide will serve as your crash course in Cannabis Investing 101.
What Is Cannabis Investing?
If you already know the basics of investing or you’re familiar with the legal landscape concerning cannabis investments, you can skip this section. If you’re a new retail investor, read on.
Cannabis investing means investing money in stocks, mutual funds, ETFs, SPACs, IPOs, or other financial instruments that focus on the legal, regulated cannabis industries. It can mean investing in businesses that actually grow and sell pot, often referred to as pure-play businesses. You can also invest in businesses that support pure players but don’t actually handle the weed, called ancillary businesses.
Basically, you place an educated bet on a cannabis company or group of companies (in the case of ETFs and mutual funds). If that entity’s value increases, you get investment income. Investment income can come in the form of capital gains, interest payments, and/or dividends.
For you, the retail investor, you’ll mainly invest in stocks. Stocks are easy: You buy some shares (or fractional shares), wait, and if the stock increases in value, you can sell it for a profit (that is taxed).
Or, you can sell your stock at a loss if you fear it may go bust. Which brings us to the most important rule of investing: You always risk losing every penny you invest. Never invest money that you can’t afford to literally throw away.
New investors may be wondering how any of this is even legal. After all, how can you invest in cannabis if it’s still federally outlawed in the US? Furthermore, how can you invest in a plant that the feds consider more dangerous than cocaine and meth?
First, understand that there are two types of cannabis, both belonging to the species Cannabis sativa. One kind can get you stoned, the other cannot. The cannabis that gets people stoned is legally dubbed “marijuana” in the US (or “cannabis” in Canada). The cannabis that cannot get anyone stoned is dubbed “hemp” in the US and Canada. Hemp is legal in the US and has been since 2018. And yes, some stocks focus entirely on hemp, not marijuana.
Second, marijuana has been federally legal in Canada for over two years. Since Canadian cannabis companies legally operate in Canada, they can also legally list on public US stock exchanges. US pot companies can exploit this loophole by setting up operations in Canada, then listing on the Canadian exchanges which qualifies them to list on the US exchanges, too. Neat, eh?
So long as you’re investing through public exchanges, your investments and profits should be OK. The US Securities and Exchange Commission says so. Stick with your Robinhood, Fidelity, or M1 Ameritrade apps, and you’ll be fine.
How the Biden Administration Will Affect the Future of Cannabis Investing
In less than a year, Joe Biden went from calling cannabis a “gateway drug” to turning over a new (pot) leaf and calling for the plant’s decriminalization. If even Sleepy Joe can wake up and smell the CBD-infused coffee, the Democrat-controlled Congress will likely pass sweeping cannabis reforms by 2022.
For one, the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act only needs Senate approval before it lands on President Biden’s desk. The MORE Act would federally legalize cannabis and create low-interest business loan programs for qualifying entrepreneurs. If the Senate splits 50/50 on its passage, Vice President Kamala Harris will cast the tie-breaking vote. And we know she’ll support the initiative because Harris is the MORE Act’s primary sponsor.
Basically, we’re about to see the green flood gates open. In 2020, the US market raked in over $24 billion for both hemp and weed combined, despite obstacles such as tax code 280E, interstate transport bans, and a lack of banking access. In other words, American cannabis is currently worth more than plant-based meats, 3D printing, and even the entire global music recording industry. That value will climb once the Democrats and their reasonable Republican allies enact some long overdue changes to federal law, which could mean good news for indica-friendly investors.
What Are Cannabis ETFs and SPACs, and Why Are They Big Deals?
If keeping tabs on individual stocks sounds like a pain in the bud, you’ve got options. An exchange traded fund, or ETF, is a stock that works much like a mutual fund. Cannabis ETFs invest in other cannabis companies, but the ETF itself trades as a single stock.
ETFs also possess some advantages over mutual funds: They’re cheaper to buy into and they’re easier to cash out of. Since ETFs invest in the most promising businesses, you should only go bust if the entire market goes bust, too. One major disadvantage with ETFs is they don’t typically include mid- or low-tier stocks, so you could miss out on a surprise performer. Some top cannabis ETFs include MJ (for Canadian weed), MSOS (for US weed), and POTX (for pharma).
Now, special purpose acquisition companies, or SPACs, are a bit more complicated. Cannabis SPACs only raise capital for IPOs, with the sole purpose of acquiring smaller, privately traded cannabis companies and bringing those acquisitions onto public exchanges. SPACs can also raise capital for high-risk weed enterprises, which remains one of the industry’s biggest barriers to growth. Due to fear of federal reprisal, blue-chip firms like Putnam and Blackrock aren’t investing in weed right now.
SPACs come with their own unique sets of advantages and disadvantages for retail investors, though. Before buying in, know that a SPAC’s investors always carry the most risk and receive the smallest portion of payouts. Additionally, retail investors get the benefit of investing in an IPO (something they typically can’t access), but they always invest in the sponsor, not in the target company. The biggest winners with any SPAC are usually the SPAC’s sponsors, who take the largest cut of the pie from both the target and the investors.
SPACs also come in two flavors: Those founded by people who only understand financing and those founded by people who understand financing and how to operate the target business. Place bets on SPACs that fall into the latter category. Otherwise you risk investing in a SPAC that may strike hot at first, only to plummet once it’s mismanaged into the ground.
Given all this risk, why even invest in SPACs? Since SPACs bring private startups onto public exchanges, if you make a smart and lucky bet, you could be investing early in the next cannabis unicorn — which every investor, retail or pro, dreams about.
Some top cannabis SPACs include Subversive Capital Acquisition Corp. (where rap mogul Jay-Z serves as a board member), Silver Spike Acquisition (which now owns the Google Maps of marijuana, WeedMaps), and Schultze Acquisition.
Which Cannabis Investments Are Success Stories?
For investment newbies, check out some primers (here, here, and here, in that order) on how to gauge wise investments from unwise ones. Investing in anything requires a lot of homework, so get to reading before you infuse a single dollar anywhere.
For now, focus on companies with market caps above $200 million. If these stocks boast steady growth over a five-year period, even better. Most of these companies are based in Canada, but some, like Curaleaf (OTCQX: CURLF) and Green Thumb (OTCQX: GTBIF) are headquartered right in the good ol’ US of A.
While US cannabis companies have the most potential to boom with federal legalization, Canadian cannabis companies may be excellent bets, as well. US legalization means Canadian companies can freely break into the US markets, where they may experience fewer regulations than they do in the Great White North. (Maybe.) Some Canadian producers are already edging in, such as when Columbia Care bought one of Colorado’s largest dispensary chains last year.
Also, consider investments into ancillary industries. Fertilizer producers like Scotts Miracle-Gro, hydroponics suppliers like Hawthorne Gardening Co. (Scotts Miracle-Gro’s weed subsidiary), REITs like Innovative Industrial Properties, lighting suppliers like Cree and Osram, and packagers like Kush Bottles are rolling in the dank dough, since they aren’t subject to the same financial restrictions as pure-play pot companies are.
Which Cannabis Companies Should Be Avoided?
All cannabis investments are considered high-risk. What looks like a sure winner today could go belly-up tomorrow, so spread that financial love across the board to minimize risk.
You may want to avoid companies sitting on massive piles of debt or are poised to issue, or have already issued, a bunch of new shares. Issuing new shares raises capital, but it also dilutes the value of existing shares. A few high-debt or share-happy companies include Aurora Cannabis, Canopy Growth, and Aphria Inc. However, that’s not to say they’re bad bets altogether.
For example, Aphria’s stock blew up in December after it merged with Tilray to become the world’s largest cannabis company. Any of the aforementioned players could pay off in the long run — but for right now, if you’re playing it safe (as safe as one can in cannabis), put your money elsewhere.
Additionally, penny stocks are dirt cheap. If you’re tempted by penny stocks’ low prices, don’t be. There’s a reason why they trade shares for pocket change: They aren’t pulling in revenue or they’re not making decent payouts to investors. Sure, Apple, Inc. was once a penny stock way back in the day, but the vast majority of these discount startups fail.
However, penny stocks aren’t always losing bets. As of this writing, cannabis stocks are soaring, including those trading below $5 a share, thanks in part to the 2020 Blue Wave election. For instance, Sundial Growers’ price jumped over 1,300% from November to the second week of February. MedMen saw its shares jump from a mere $0.17 on February 2 to $1.34 just one week later.
Yet, you should always remain cautious against the allure of quick, easy money from penny stocks. If you know what you’re doing, penny stocks can serve as excellent speculation instruments. When picking long-haul investments, make careful notes for any red flags regarding mismanagement, regulatory non-compliance, empty promises, or scandals. Despite huge gains, Sundial Growers has struggled with various issues at its production facilities. Meanwhile, MedMen has been accused of mishandling its expansion, and Aurora Cannabis is currently under investigation for allegedly defrauding investors.
I Have $420 to Invest in Cannabis. How Do I Start?
So you’ve got some green ready to burn on the green. Where should you begin investing those funds?
Try this: Split that $420 into four parts. Put $200 into cannabis ETFs, $150 into ancillary stocks, $50 into that one company you’ve got a really good feeling about (even one we suggested you avoid), and the remaining $20 into riskier pursuits like penny stocks, cannabis cryptocurrencies, SPACs, or REITs. Feel free to split those bigger chunks across more than one entity, such as $100 each into two ETFs or $50 across four ETFs.
Then, go to The Winchester, have a nice cold pint, and wait for the earnings to roll in. And be patient. If you’re playing the long game (as you should with stocks), your money will grow over time. You’ll take some losses along the way, but that’s how the cannabis cookie crumbles. Within the following months, you’ll see which picks were winners and which were losers.
With ETFs especially, look up which companies are included in the ETF package. That will give you a better idea of which individual companies to invest in and which to avoid. Feel free to yank money out of the losers. Put more money into the winners. Repeat.
Of course, this guide isn’t official investment advice. These are just some unofficial tips to point you in the right directions. For official guidance, find a licensed financial advisor, particularly one seasoned in the cannabis space. And, as always, there’s no guarantee you’ll ever make returns on your pot stock investments. But the risk is half the fun, right?
Randy Robinson’s work has appeared in VICE, VICE UK, MERRY JANE, NORML, Rooster, and OUT FRONT Magazine, covering pop culture, business, sex, drugs, science, tech, history, politics, and LGBTQ+ topics. Based in the Mile High City of Denver, Colorado, they’ve been at ground zero of US cannabis legalization since it started.