Growing the Grow

Global spending on legal cannabis is expected to grow 230%, to $31.3% billion in 2022, compared to $9.5 billion in 2017, according to Arcview Market Research and BDS Analytics. The research suggests that most of that, nearly $23.4 billion, will be spent in the U.S. With more states voting for the legalization of marijuana and business interest sparking, that definitely makes sense.

In the year ending Jan. 11, 2019, the United States Marijuana Index fell 20.7%, compared to a loss of about 6.5% by the S&P 500. But the marijuana index then rose from $91 at the start of the year to $120 May 10, 2019, an increase of about 13%, a tad better than the S&P's rise of a bit under 12%.

That is not exactly an apple-to-apple comparison, but it does make a case to carefully investigate investments in marijuana stocks before you buy.

Key Takeaways

  • "Plant touching" businesses are involved in the actual production and distribution of marijuana.
  • Pharma/biotech companies are working to create medicines based on cannabinoids.
  • Ancillary businesses provide supplies and equipment to marijuana producers.
  • Services companies provide real estate, consulting services, technology, and more to the growing marijuana business.

Marijuana Regulation: The Facts

While Canada legalized marijuana in late 2018, it remains illegal under federal U.S. law and is still classified as a controlled substance without proven medical benefit, along with heroin and LSD. However, with some 30 states voting to make cannabis legal for medicinal use, recreational use, or both, marijuana regulation in the U.S. essentially is a hot mess.

30

The number of states in which voters have approved the legalization of marijuana for medical or recreational use or both.

In 2018 alone, the following states voted in favor of marijuana legalization:

Michigan: Voters legalized marijuana use and cultivation for people over the age of 21 and authorized the commercial sale of marijuana through state-licensed retailers.

Missouri: Voters approved legalizing marijuana for medical purposes and allowing patients to cultivate plants at home.

Oklahoma: Voters approved legalizing marijuana for medical use.

Utah: Voters approved some use of marijuana for medical purposes.

How messy is it getting? The Transportation Safety Administration posted a lengthy Instagram message in May 2019. The TSA informed travelers that they most definitely are not looking for marijuana in anyone's luggage. However, if they find it they are obliged to report that fact to the federal authorities.

The state of regulation and federal law enforcement will, needless to say, determine the fate of this industry.

Where Marijuana Stocks Are Listed

Both the New York Stock Exchange (NYSE) and the Nasdaq got their first pure cannabis company listings in 2018. The Cronos Group became the first to make its trading debut on Nasdaq in February of that year, while Canopy Growth Corp. became NYSE’s first pot listing in May.

Many marijuana companies remain penny stocks and are traded primarily in the Over-the-Counter (OTC) markets. That increases both investor skepticism and risk perception for any investment.

In light of the regulatory uncertainty, some companies in the sector have headed north of the border. California-based MedMen is an example, as reported by CNBC.

What to Watch Out For

As with any investment, investors must do their homework before they place their bets. That can be difficult for companies trading in the OTC markets, which have less stringent filing and disclosure requirements.

"Just because a cannabis company is trading on the OTC Markets Group, that doesn’t mean that they’re a sketchy stock. It only means that it’s the only place that they could go. So there are some good names in the OTC Markets group. Don’t let that scare you away. And having said that, there are some less-than-stellar names in the New York Stock Exchange trading there," Debra Borchardt, co-founder, and editor-in-chief of Green Market Report said in an Investopedia Webinar on Cannabis Investing.

Take, for example, INSYS Therapeutics (INSY), a Nasdaq-listed pharmaceutical company that was betting big on a cannabinoid oil-based drug to treat loss of appetite in AIDS patients and nausea caused by chemotherapy and anti-cancer medicine. The company got FDA approval for its drug Syndros in 2016. However, its stock took a beating from its 2015 highs of about $44 to about $5.74 in October 2017 when company executives were charged with offering kickbacks to doctors to prescribe its fentanyl-based drug Subsys. It closed at $3.58 on May 10, 2019.

Borchardt also cites The Green Organic Dutchman Holdings Ltd. (TGODF), a Canadian company that listed on the Toronto Stock Exchange in May 2018 and saw its shares fall 36.7% by the end of 2018. A major reason may have been that the company had no revenue. It has since reported revenue of $1.8 million for 2018.

Cultivation/Operation Investing

You could invest in the growers, the so-called "plant-touching" companies. If you prefer, you could invest in a company that is strictly in the business of medical marijuana.

Canopy Growth Corp. (CGC)

The first Canadian marijuana company, Canopy Growth Corp. is the world's largest publicly-traded weed company. The company owns and operates many brands, producing and marketing both medical and recreational strains. Tweed is one of the company's most popular brands, thanks to an association with rapper Snoop Dogg. For its 2019 fiscal year, it reported revenue of CAD 77.9 million or nearly $60 million.

In October 2017, Constellation Brands, the beverage giant, and maker of Corona beer bought a 9.9% stake in Canopy Growth. The deal offers both companies a chance at new product lines such as cannabis-infused beverages.

Aurora Cannabis Inc. (ACB)

Another big Canadian pot company, Aurora Cannabis became even bigger in March by acquiring rival MedReleaf in a $250 million all-stock deal that was touted as the world's largest marijuana deal to date. Consolidating operations will help the new entity cut costs and gain efficiency. According to a press release, Aurora and MedReleaf together expect to produce over 570,000 kilograms per year of cannabis through nine facilities in Canada and two in Denmark. 

Aurora debuted on the Canadian venture stock exchange (TSX) in October 2016 and trades in the U.S. on the NYSE.

Cronos Group Inc. (CRON)

Nasdaq's first pot stock, Cronos Group is a Toronto-based cultivator of medical marijuana. In addition to Canada, Cronos serves international markets, shipping its products to Germany, building a facility in Israel, and starting a joint venture in Australia. Cronos Group does not have a presence in the U.S. due to the uncertainty in regulations.

As of its 2018 fiscal year, the company generated $7.3 million in revenue.  

As the legal barriers fall, traditional vice companies like big tobacco and alcohol can be expected to get into the marijuana business.

Terra Tech Corp (TRTC)

Incorporated almost a decade ago, Terra Tech is a diversified agricultural company with operations in the production and dispensing of medical marijuana. Its own medical marijuana brand is IVXX, while its cultivation activities operate under the brand name Edible Gardens. The company also operates retail medical marijuana stores under the name Blum.

The OTC-listed company has operations in the U.S., including a California Temporary Authorization to cultivate, manufacture, distribute, and retail cannabis. It also has Blum dispensaries and two large cultivation facilities in Nevada.

In its latest earnings report, the company declared revenues of $8.6 million for the quarter ending March 31, 2018.

Pharma/Biotech Investments

Investments are also available in companies that synthesize the plant for use in various medical applications

AbbVie (ABBV)

AbbVie is a pharmaceutical company with a synthetic cannabis-based drug on the market. The FDA approved Marinol, which helps alleviate nausea in chemotherapy patients and appetite loss in AIDS patients.

Marinol is not AbbVie's flagship drug. In fact, it is not even the company's biggest seller. That makes investing in this company a way to play the marijuana trend without going all in.

GW Pharmaceuticals (GWPH)

A big win for U.K.-based GW Pharmaceuticals came on June 25, 2018, when the FDA approved the first drug derived from an active marijuana ingredient rather than synthetically derived cannabinoid compounds. The drug, Epidiolex, has been approved for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut syndrome, and Dravet syndrome.

The company is listed on Nasdaq as an American Depository Receipt (ADR).

Cara Therapeutics (CARA)

This clinical-stage biotechnology company develops drugs for the treatment of pruritus and acute and chronic pain. Its product pipeline includes both opioid and cannabinoid drugs. However, the CB agonist CR701 that makes it eligible for this list is still in its pre-clinical trial phase and a lot rides on the outcome of the trials before the stock could get a high from marijuana.

Axim Biotechnologies (OTC: AXIM)

This biotech company is working on at least 16 drugs in various stages of pre-clinical and Phase I & II clinical trials. The drugs are aimed are treatments for a number of different ailments ranging from dry eyes, inflammatory bowel disease, opioid addiction, and even smoking cessation.

Ancillary Business Investments

The booming marijuana industry requires the services of a wide range of other businesses in their day-to-day operations of growing and packaging.

The Scotts Miracle-Gro Company (SMG)

In 2016, Jim Hagedorn, CEO of the lawn care and garden supplies company, decided to make a huge push into cannabis through hydroponics. In a Forbes profile titled "Cannabis Capitalist," he said he wanted to invest a half billion dollars in hydroponics. He didn't disappoint. The company later acquired hydroponic equipment maker Sunlight Supply Inc. in a deal valued at $450 million.

KushCo Holdings (OTC:KSHB)

Founded in 2010, Kush Bottles provides packaging solutions and supplies and even branding services to cannabis producers. The company operates across 12 facilities in the U.S. It reported 2018 revenue of $52.07 million, a big jump from the previous year's $18.8 million.

GrowGeneration Corp (OTC:GRWG)

This company owns and operates specialty hydroponic and organic gardening supplies stores in 17 locations across six states. The stores sell nutrients, soil, lighting, and hydroponic supplies. The company generated $29 million in 2018 and says it's targeting $84.6 million by 2020.

Marijuana Business Services Stocks

From real estate needs to office needs, there are many businesses that cater to the industry.

General Cannabis Corp (OTC:CANN)

This company provides ancillary services to producers and businesses in the marijuana industry, ranging from real estate, consulting, business development, and even security. The Denver-based company even owns a specialty cannabis lifestyle apparel line under the brand Chiefton Supply Co. 

Innovative Industrial Properties Inc. (IIPR)

This is a Real Estate Investment Trust (REIT) dedicated to buying and leasing industrial properties for medical marijuana production. It owns properties in Arizona, California, New York, Maryland, Minnesota, and Pennsylvania. Its 2018 revenue was $14.79.

mCig Inc. (MCIG)

This diversified holding company has a portfolio that spans technology and consulting, products including vaporizers, media assets, growers and cultivators, and even dispensaries.

Riding Cannabis Sin Stocks

With pot's growing popularity and the legal barriers falling, traditional vice companies like big tobacco and alcohol began to worry about its impact on their sales.

Moody's issued a report that suggested that alcohol and tobacco sales could suffer from growing pot sales but also identified the trend as a potential opportunity for these companies to create new product lines.

 "As marijuana is legalized, it could replace alcoholic beverages on some drinking occasions, but also be used to formulate new beverages," the report said. "At a time when cigarette smoking is on the decline, we expect that U.S. tobacco companies will enter the U.S. marijuana market, but only if marijuana becomes federally legal."

These companies have already begun to get ready for that.

Constellation Brands (STZ)

Not only did the maker of Modelo beer and Svedka invest $190 million to buy a stake in Canopy Growth, but it is working on cannabis-infused non-alcoholic beverages.

The first is expected to hit stores in 2019.

Heineken N.V. (HEINY): Market Cap $50.6B

The European beverage giant's latest offering in the pot-infused product market is the Lagunitas' IPA-inspired and THC- and CBD-infused sparkling water called Hi-Fi Hops. Heineken completed the Lagunitas acquisition in 2017 after initially taking is a 50% stake in the company.

Lagunitas has tied up with medicinal marijuana company CannaCraft to add the THC/CBD ingredients to the product that is being distributed initially through dispensaries in California.

Molson Coors Brewing Company (TAP): Market Cap $13.7B

Molson Coors has been pretty vocal about the impact of legal pot on its business. Earlier this year, the company in its SEC filing listed legal marijuana as a risk factor to its business stating, "although the ultimate impact is currently unknown, the emergence of legal cannabis in certain U.S. states and Canada may result in a shift of discretionary income away from our products or a change in consumer preferences away from beer."

In October 2018, Molson announced a deal with cannabis company The Hydrotherapy Corp. to develop cannabis-infused beverages for the Canadian market.

Where to Buy Marijuana Stocks

Marijuana stocks can be acquired from most major brokers. Their availability may depend on whether they are traded on a major exchange or are over-the-counter stocks. If you have an interest in assets like this, you'll need a brokerage account to buy them. You can check out Investopedia's list of the best online brokers to get you started. (For related reading, see "Understanding Medical Cannabis vs. Recreational Cannabis Stocks")