Buzz
In recent years, cannabis, or as it's often called, legal weed, has quickly become a $9.7 billion industry. Experts forecast its growth to nearly $25 billion by 2021. With marijuana now legalized for recreational use in eight states and the District of Columbia, and for medicinal use in 29 states plus DC, it's a booming market. The Cannabis Stock Index (yes, it exists) saw impressive gains of 88.8% in 2016 and 91.8% in 2017.
Whether you're motivated by supporting the cause, earning some profit, or both, many individuals are now eager to invest where their Mary Jane is. Here's what you need to know if you're considering adding cannabis to your investment portfolio.
Is it Possible for Weed Investments to Be Legal?
For many U.S. investors, their capital is flowing north to Canada, where marijuana is set to become fully legalized by July. 'In Canada, several licensed producers are already trading on the Toronto Stock Exchange (TSE),' says Alan J. Brochstein, a certified financial analyst and founder of 420 Investor and New Cannabis Ventures. 'This signals the industry's maturation there.'
In the U.S., most cannabis-related companies you can invest in are considered 'ancillary,' meaning they don’t directly handle the plant. One such company is Kush Bottles, which manufactures packaging. 'They avoid the costs of growing weed or dealing with federal regulations,' explains Jason Spatafora of MarijuanaStocks.com. 'Their job is to just make baggies.' Other ancillary businesses produce vaporizers, irrigation systems, or software; even Scotts Miracle-Gro is, according to Spatafora, 'a marijuana stock now.'
Another significant sector is biotech, with companies like GW Pharmaceuticals, Cara Therapeutics, AbbVie, Zynerba, and Insys Therapeutics using endocannabinoids to treat conditions such as epilepsy and cancer pain. These companies offer some of the most promising investment opportunities, but it's important to know what you're investing in. For example, Insys has actively lobbied against marijuana legalization, which may conflict with your personal values or investment goals. Additionally, Canadian company Emblem highlights that its president played a key role in launching Oxycontin.
What You Need to Know About Cannabis Stocks
If you're looking to invest in Canadian or U.S. cannabis companies, you have two primary options: penny stocks on over-the-counter exchanges or traditional stocks on major exchanges like the TSE, NASDAQ, and NYSE. Both can be bought through online brokerages like Fidelity and Ameritrade.
Penny stocks may appear affordable, but they come with significant risks. 'These stocks are highly volatile and often lack liquidity, meaning fewer investors, which can lead to extreme price fluctuations,' explains Debra Borchardt, CEO and editor-in-chief of Green Market Report.
When Spatafora, known as the 'Wolf of Weed Street' for his love of penny stocks, began investing in 2013, he quickly learned the risks. 'I'd never invested in penny stocks before,' he recalls. 'I bought 10,000 shares for $500. Two days later, the stock surged 50%, and two days after that, it crashed.'
Is There a Mutual Fund for Weed Investments?
There isn't a weed mutual fund, but there are two exchange-traded funds (ETFs): Horizons Marijuana Life Sciences ETF (HMMJ) and Alternative Harvest ETF (MJX). Of the two, both Borchardt and Brochstein recommend the former.
Traded on the TSE, HMMJ includes shares from over 25 companies and has seen a 121% increase since its launch in April 2017. However, most of its investments are concentrated in Canada, which Brochstein of New Cannabis Ventures notes is 'a very narrow universe.'
'I believe it’s suitable for those who aren’t confident in selecting individual stocks from that sector, or those with limited capital who can't diversify due to commission fees,' he said. 'For investors looking to tap into the U.S. market, there are no ETF options available.'
Other Investment Opportunities
While stocks are the easiest way to enter the marijuana market, accredited investors—those with over $1 million in assets (excluding their home) or an annual income over $200,000—can also invest directly in private companies.
One way to connect with entrepreneurs is through The Arcview Group, a cannabis investment network that carefully selects and vets the companies it introduces to its 600+ members each week. Success stories from Arcview include Mirth Provisions, known for cannabis-infused beverages, and Eaze, a marijuana delivery service.
'We've never seen a multibillion-dollar industry, growing at 30 percent annually, where federal law keeps the major players out of the game,' said William Petruski, Arcview’s VP of sales. 'This is a huge opportunity for private investors to get involved and see returns, much like the IT investment networks of 30 years ago.'
But Isn’t This a Risky Time to Invest?
On January 4, Attorney General Jeff Sessions rescinded an Obama-era memo that let states largely set their own rules for prosecuting marijuana offenses. While the future remains uncertain, experts believe this doesn’t make it a bad time to invest. (It’s important to note that the most reliable investment opportunities are still in Canada.)
While Brochstein has become more cautious with his investments and has recommended his followers reduce their exposure, others see it differently. 'I actually think it’s a good time to invest because stock prices have dropped,' says Borchardt of Green Market Report. 'The states are pushing back, and I believe stock prices will rise again as others become more comfortable with the risk. The best investors buy when everyone else is scared.'
Arcview’s Petruski, who predicts that legalization will happen 'sooner than we think,' views this moment as 'one of those situations that gives a nervous investor an excuse to stay on the sidelines.' However, for those 'bold enough to recognize that we’re on an irreversible path, this is an opportunity for investors,' he said. 'You’ll never find better deals than right now.'
How to Prepare Before Investing in Cannabis
Cannabis offers an exciting investment opportunity, but, like any investment, it’s important to do your homework. Vet potential companies carefully and keep an eye on legislative developments. A great place to start is by 'paper trading'—recording your buying and selling decisions and tracking how well you do.
'The sheer amount of information—and misinformation—out there is staggering,' said Petruski. 'In any investment strategy, information is king. In this industry, it's even more crucial.'
Regardless of when or how you choose to enter this rapidly growing market, remember Brochstein’s wise words: 'Treat cannabis investing like edibles: Start low and go slow.'
