As you can see, there’s a lot to consider when investing in pot stocks. The decision to invest in marijuana stocks ultimately depends on the needs of the individual investor and the goals of the portfolio. If you choose to invest in marijuana stocks, use caution because the industry is fraught with risk. While there is a lot of money to be made in the marijuana industry, this doesn’t mean that all marijuana stocks are a good investment. As with any other investment, it’s important to educate yourself and do your research so that you can make a wise investment decision.
Should I Invest in Marijuana Stocks?
In the United States, the marijuana business is booming thanks to the legalization of marijuana in many states. More than half the States and the District of Columbia have decriminalized or outright legalized recreational marijuana, medical marijuana, or both. And as legalization occurs in more states, cannabis sales have continued to increase. In the United States alone, sales of legal marijuana hit $25 billion in 2021 and the market is still growing.
The growth of the marijuana industry and continued expansion of legalization is not limited to the United States. Cannabis laws are changing all over the world.
An industry growing at this pace, and with this much money involved, provides lucrative opportunities for investors to make a profit. As with any new industry, however, many investors lack access to reliable information and therefore can make uninformed, emotional decisions. Taking the time to learn about this new and growing industry is essential for achieving financial success with pot stocks or any investment.
Marijuana stocks carry an additional amount of risk due to the constantly shifting regulatory and legal environment—it is still illegal under federal law and there is no sign Federal legalization will come any time soon.
How to Invest in Marijuana Stocks
Before investing in marijuana stocks and deciding which marijuana stocks to watch, you should first understand the different types of marijuana products that are available on the market.
Marijuana and hemp are both cannabis products. Marijuana naturally contains Tetrahydrocannabinol (THC). THC is the primary psychoactive component of marijuana and it is what causes users to experience a “high” when they smoke or ingest marijuana. Hemp, on the other hand, is also a cannabis product but it contains little to no THC and therefore cannot cause a psychoactive reaction.
One hemp product that you’ve likely heard a lot about is cannabidiol which is often referred to as CBD. Though marijuana contains CBD, most CBD products are extracted from hemp which contains little to no THC. Since it lacks THC, hemp was legalized nationally in the United States in 2018 and is being sold nationally.
When it comes to marijuana, the two main categories are recreational and medicinal. Many companies fall under the umbrella of medical cannabis stocks which focus on therapeutic uses for cannabis. There is medical marijuana for legal smoking, but there are also a growing number of FDA-approved derivatives and drugs that use marijuana or substances found in marijuana.
The FDA approved a drug called Epidiolex in 2018 that treats rare forms of epilepsy. Epidiolex is a CBD-based drug and is the first FDA-approved CBD drug on the market. The FDA has also approved three THC-based drugs. These THC-based drugs have been approved for the treatment of some of the side effects of chemotherapy, specifically nausea and vomiting. An important note on these THC-based drugs is that all three use a synthetic form of THC, as opposed to THC from marijuana plants.
How to Buy Marijuana Stocks
Marijuana stocks are not limited to companies that grow marijuana. The marijuana industry includes companies that are involved in all aspects of the cannabis business from setting up grow rooms to finance. Other areas these companies are involved with include pharmaceutical research, horticulture, and even real estate.
Cannabis businesses can be set up in different ways too. The growers may distribute their marijuana to customers, or they may distribute it to retail stores who then distribute it to customers. The most comprehensive businesses are vertically integrated and include all aspects of the cannabis market.
When reviewing the financials of a marijuana company, it’s helpful to understand a few things about the production costs of marijuana. For marijuana products, there are two types of production costs: The “all-in” cost is the total cost of a gram of marijuana, from start to finish. In contrast, the “cash cost” per gram does not include some expenses, such as packaging or amortization. Understanding this difference can help you conduct an accurate comparison of different companies.
Where to Buy Pot Stocks
Many marijuana stocks are trading over the counter (OTC) as opposed to on major stock exchanges. If you choose to invest in OTC marijuana stocks, you should use extra caution and do an appropriate amount of research prior to investing. OTC stocks have an added layer of risk. Unlike companies listed on major stock exchanges, OTC stocks aren’t required to regularly file financial statements or maintain minimum market caps. These requirements are meant to help investors make more informed decisions about their investments and minimize the risk of major price fluctuations caused by buying and selling the stock.
Almost all marijuana stocks have historically been traded exclusively OTC, but that trend changed with the legalization of Canadian recreational use. Today, more marijuana stocks are trading on major exchanges and the number is growing.
In regard to geography, the Canadian market is vastly different than the US fractured market. Notably, many of the major US players have deals with the major Canadian players that will allow a rapid international expansion once the US legalizes cannabis nationwide.
Marijuana Stocks That Pay Dividends
Dividends are a way for shareholders to take part in the profits of a company. When companies pay out dividends, they give a certain amount of money to each person who owns stock in the company. This means that you can make money by simply owning the stock. You can then choose to either reinvest your dividends or have the money deposited into your bank account.
The bad news is that most cannabis companies do not pay dividends. The one that stands out is Innovative Industrial Properties which is a REIT. Innovative Industrial Properties buys cannabis facilities from the grower and then leases it back to the grower. This provides capital to the grower and a recurring revenue stream for the company. The company uses the revenue to buy more properties and pay a dividend to investors.
Marijuana Companies to Invest In
Whether you’re looking to invest in the best growth stocks, or you’re only interested in the best cheap stocks to buy, you can likely find something that meets your needs in the marijuana market. If you decide to invest in marijuana stocks and are looking for companies that also pay dividends, you have a few options. Three companies that have recently paid some of the highest dividends in the marijuana industry are Altria, Molson Coors Brewing, and Scotts Miracle-Gro.
Altria Growth (NYSE: MO)
Altria pays one of the highest dividends in the stock market. Altria’s business has been historically focused on tobacco products but, due to the decline in the tobacco industry, Altria is moving from tobacco to marijuana. In late 2018, Altria spent $1.8 billion purchasing a 45% stake in Cronos Group (NASDAQ: CRON), which is a marijuana producer based out of Canada.
Molson Coors Brewing (NYSE: TAP)
Miller Lite and Coors are both beer brands of Molson Coors Brewing Company. Though the company is best known for its beer, it has a joint venture with Canadian marijuana producer, HEXO, to create beverages infused with cannabis for the Canadian and US markets.
Scotts Miracle-Gro (NYSE: SMG)
The company known for its gardening has heavily invested in ancillary services in the marijuana industry. The company has made it clear that it is not a grower or producer of marijuana and does not invest in companies that are growers or producers of marijuana but it is operating as the designer and manufacturer of grow rooms and growing equipment.
Best Marijuana Stocks
The best marijuana stocks for you will depend on what you’re looking to gain and how much risk you’re able to take. There are a few obvious options worth considering, however. Two of the top stocks to watch are Aurora Cannabis (NYSE: ACB), and HEXO (NYSE: HEXO).
Aurora Cannabis (NYSE: ACB)
Aurora is a Canadian-based cannabis producer. According to its projected fourth-quarter results, the company is on track to grow rapidly in the next quarter. There’s also reason to believe that Aurora may have a partnership deal in the works.
HEXO (NYSE: HEXO)
Does this name sound familiar? If so, that’s because it’s the Canadian cannabis company that has a joint venture with Molson Coors Brewing, which was one of the companies mentioned above for paying out dividends. HEXO is working with Molson Coors Brewing to produce a cannabis beverage to be sold in Canada but that’s not why it's a top company. The company is among the best capitalized and on track to produce profits.
Marijuana isn’t legal at the federal level in the United States but CBD is. CBD is extracted from hemp, which is legal in the United States. CBD does not get users “high” since it does not contain THC but it has other health benefits. This means that you can invest in legal cannabis products without actually investing in marijuana.
Since hemp became legal in 2018, the number of CBD products in the United States has skyrocketed. There are CBD pills and supplements, as well as CBD lotions and gels. There are even CBD bath bombs that can provide a relaxing and healing soak in the tub.
Though the CBD market is far from stable, it’s less volatile than marijuana stocks because there is less legal uncertainty. There are plenty of cannabis companies that produce both marijuana and CBD products, but there are also companies that work exclusively with CBD. Keep in mind that even though CBD is legal in the United States, many lucrative CBD stocks are still in Canada.
Are Marijuana Stocks a Good Investment?
The marijuana industry is similar to any new industry—there is a lot of potential but also a lot of risk. It’s wise to use extra caution when investing in marijuana stocks because it’s easy to get caught up in new and exciting industries and make emotion-based decisions.
Cannabis stocks do carry extra risk. While there’s no way to predict the future of any investment, predicting the marijuana industry is especially difficult. First, there are the changing laws. This makes it incredibly difficult to predict the future legal status of marijuana. Secondly, there’s little historical data to help inform decisions. For this reason, investors should tread carefully in the marijuana space.
Should a Stock Market Investor Buy Marijuana Stocks?
Marijuana stocks can be a great investment as part of a diversified portfolio. However, due to the constantly shifting regulatory nature of the marijuana industry, investing in marijuana does come with an extra layer of risk so diversification is important.
Investors who wish to minimize their risks may find it preferable to avoid investing in individual marijuana stocks. Instead, investors may choose to invest in a mutual fund that, in turn, invests in many different marijuana stocks. Since marijuana stocks carry additional risk, they should not be the sole investment in your portfolio or even a large part of your portfolio. But done correctly, investing in marijuana stocks is a good way to diversify your portfolio as this exciting industry continues to grow.