Cannabis is the latest hot commodity to take markets by storm.
Many public companies are benefiting from global growth in new markets for recreational
and medical marijuana, as well as hemp and cannabidiol, also called CBD.
If you're wondering how to invest in marijuana stocks, here's where to start if you want
to go for the green. In 2018, global cannabis sales reached $12.2 billion.
In 2019, sales should soar to $16.9 billion.
Some analysts estimate that annual marijuana sales could eventually reach $166 billion.
While sales likely won't approach that figure in the next 10 years, it's still clear this
opportunity is huge, and that has investors excited.
Marijuana is legal for medical use in more than 40 countries, and for recreational use
in Canada and Uruguay.
In the U.S., 33 states have legalized medical use, and 10 states plus D.C. allow recreational use.
But on a federal level, marijuana remains illegal in the U.S. and is classified by the
Drug Enforcement Administration as a Schedule 1 substance.
Future sales growth will be driven by new markets opening, new products, pot companies scaling,
and the growth of the U.S. market, which has seen explosive popularity since
President Trump signed the U.S. Farm Bill legalizing hemp products like CBD.
Now that we've gotten the lay of the land, let's discuss how investors find pot stocks
that will become multibaggers over time.
Let's start by looking at two different ways to invest in cannabis.
First is the pure play approach, in which you invest in a company directly involved
in the marijuana or hemp industries.
The biggest marijuana producers, all based in Canada, are Canopy Growth, Aurora Cannabis,
Cronos Group, and Tilray, but they're not the only pure way to play the market.
Charlotte's Web sells CBD oil, which doesn't elicit the high effect that marijuana is known for.
MedMen operates North American marijuana dispensaries.
Its seven California facilities make more in sales per square foot than Apple or Tiffany.
For investors interested in profiting from pot ancillary products, KushCo generates all
of its revenue from the cannabis industry by selling marijuana packaging solutions.
When you're analyzing stocks in the cannabis space, look for a couple of things in particular.
The first is profitability. Few marijuana stocks are profitable yet.
Try to determine how quickly it will become profitable and how it's funding its operations
in the meantime. The second is stock dilution.
Pot companies haven't had traditional access to capital in the past, so many depended on
financing through issuing shares, which resulted in diluting the available stock.
Look at the shares outstanding and the company's share issuance history.
Specifically for marijuana producers, there are two key metrics to know.
The first is peak production capacity, which is the estimate in kilograms of how much cannabis
can be grown under ideal conditions. The second is cost of sales per gram.
The less it costs to produce, the better off a producer will be when supply exceeds demand.
The second way to invest in marijuana stocks is by looking at established companies that
have ventured into cannabis either directly or indirectly.
This strategy exposes investors to cannabis' upside while protecting returns from the risk
that sustainable growth doesn't pan out.
For example, Corona maker Constellation Brands invested $4 billion into Canopy Growth,
and Molson Coors Brewing and Anheuser-Busch Inbev are also exploring CBD-infused beverage ventures.
Cigarette maker Altria bought a 45% stake in Cronos Group.
The e-commerce platform company Shopify also enjoys growth from online cannabis sales arrangements
with governments and pot companies.
All of these companies already have rock-solid core businesses, but could enjoy a big boost
from the marijuana industry.
When analyzing cannabis stocks, consider the usual core metrics you'd look at for any stock,
including revenue growth, net debt, and earnings history.
Next, you'll want to get a feel for how much the company stands to gain or lose from its foray into pot.
Compare its revenue from existing operations, and make sure you understand just how big
its bet is on the marijuana market. Are you ready to invest in pot stocks?
If you meet these criteria, cannabis might deserve a spot in your portfolio.
First, make sure you don't need the money for at least five years.
Cannabis is a fledgling industry that might not pay off.
You need time for your investment to generate a solid rate of return coupled with the patience
to bear any dips or prolonged weakness. Second, own other investments.
Investing in cannabis is a great supplement to an already diversified portfolio, but it
shouldn't be the only industry you're investing in.
Finally, know the market and its risks. Only buy cannabis companies you understand.
Not surprisingly, the marijuana market is just like any other industry.
You need to understand what you own; otherwise, you're just speculating, not investing.
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