Deciding on investing in cannabis? This is indeed an awesome idea as the cannabis industry is on the rise. Business analysts also predict that there will be more businesses that will stem from cannabis, which is why marijuana can be a good investment. Here are some tips and tricks to help beginner investors.
Tips in Investing in Cannabis
1. Learn About the Background of the Cannabis Industry
Before you start investing in cannabis, consider some of the basic facts about the marijuana industry. For many thousands of years, cannabis was cultivated and used because of two reasons: for medicine and recreational purposes. This is the same reason why cannabis is being grown today; however, it was just recently when cannabis was regulated for therapeutic and recreational use.
But cannabis dynamics are evolving, and in just a few years, medical marijuana is now legal in 30 + countries. Also, recreational weed is fast becoming legal in some countries, while some have decriminalized it. Marijuana is still classified as federally illegal in the US, but to this day, 30 + states have accepted the use of medical cannabis. Puerto Rico and Guam, both US territories, have also allowed the use of medical cannabis. Several US states, along with D.C., have also welcomed the use of legal recreational weed. There is also news that more states will be legalizing cannabis in the future.
US federal laws consider marijuana as illegal, but hemp was considered legal nationally in 2018. Take note that both hemp and marijuana are from cannabis, but hemp has low THC or tetrahydrocannabinol, the psychoactive component of weed. Marijuana has moderate to high levels of THC, which is why it’s very psychoactive.
Marijuana and hemp both contain CBD or cannabidiol. CBD is not psychoactive but has therapeutic effects that can help you deal with conditions like seizures, pain, inflammation, migraines, insomnia, stress, anxiety, and depression.
Different kinds of products are made from marijuana. You can find dried cannabis buds that can be rolled into joints and CBD oils and concentrate used with vaporizers, vape pens, and pipes. There are also cannabis edibles or cannabis-based food such as chocolates, pastries, brownies, cookies, gummies, chips, teas, and other snack food items and beverages. Also, products like creams, lotions, sprays, and ointments are available mostly for the instant and topical relief of pain and inflammation.
2. Get to Know the Three Primary Types of Cannabis Companies to Invest On
Before you can go ahead and invest in cannabis stocks, you need to learn about the three primary types of cannabis companies: cannabis growers, marijuana ancillary services and products, and cannabis biotechnologies.
- Cannabis growers – these are companies that are mainly focused on marijuana cultivation, which are commonly done in indoor growing facilities or greenhouses.
- Marijuana ancillary services and products – these are companies that offer products as well as services to businesses in the marijuana industry. This includes marijuana companies involved in the distribution, consulting, lighting systems, packaging, hydroponics, and others.
- Cannabis biotechnologies – biotech companies, are those that are involved in the development of prescription medications with cannabis-based ingredients.
3. Investing in Cannabis is Like Investing in Other Types of Stocks
At the moment, you can invest in any of these types of companies. Investing in cannabis stocks is also the same as investing in traditional stocks, and thus, the various principles that apply to invest in regular stocks also apply to marijuana stocks.
You need to go deeper than what a company can offer. Focus on the business executives, including their track record in the cannabis industry as well as other comparable industries. Consider the business’ strategy when it comes to expansion. Does a cannabis company prefer to acquire other companies as a way to expand, or do they prefer to grow and expand naturally?
Identify the company’s rivals and differentiate it from them. Take note if the company is profitable. As marijuana is still new, there are so many companies that are also in their early stages and hence, are not as profitable as one may think. Experts say that this is not a bad thing but do your best to identify how early a business expects to be profitable. Find out how it funds its operations at the moment.
Most of your research may be accomplished by checking out the company’s investor relations sites. Take note that everything can change fast; therefore, you must always be up to date with the latest in the marijuana investing market.
Another thing to point out is that the geographical location of a company should also be considered. Experts cite that small cannabis growers prefer Canadian markets, while larger cannabis growers are mostly found in Europe and Central America. Most of the businesses that provide ancillary services or products are located in the US while some are in Asia. Every geographic market comes with specific opportunities and risks.
4. Consider That There are Some Risks of Investing in Marijuana
Before diving headfirst to marijuana investments, you must learn about the many risks of investing in the marijuana industry. Some of these are common in almost all industries like threats from rivals and possible problems like scandals. But there are also risks associated only with marijuana stocks.
Marijuana stocks have higher market caps compared to other stocks. Most of the valuation is based on the expectation of a company’s growth. If this is not seen as soon as possible, stocks of a company may plummet.
As we mentioned, many marijuana companies are still testing the waters and may not be profitable yet, and thus these may resort to issuing shares to raise the money that they need to fuel their operations. When this happens, the value of any existing shares starts to dilute, or there’s dilution in value.
Also, marijuana stocks in the US face potential federal government seizure to enforce federal laws in different states that have declared medical or recreational cannabis as legal. This may not be too worrisome at the moment, but the current government has sent mixed signals.
5. Be Ready to Tolerate Risks
If you can tolerate risks, then investing in marijuana stocks may be the one you’re looking for. Marijuana stocks are high-risk/high-reward, and the risks are often real, but the rewards may not be easily appreciated.
And just like investing in other stocks, there are many ways to reduce risk. A beginner may first invest in cannabis ETFs, which offer diversification in multiple cannabis-related stocks. Also, trusting brands with a variety of operations in different industries like Constellation Brands may reduce risk but may not remove all risks.
6. Start Out Slowly but Surely
If you are ready to invest in cannabis stocks, you may want to start with a small portion. And if your plans work out, you may eventually add more. This is a simple yet proven strategy among first-time and seasoned investors.
We recommend that you keep an eye on the largest company in the industry. These companies offer impressive growth but may be prone to volatility driven by sales and earnings growth. Also, consider going international as experts believe that the best opportunities are outside the US.
Enroll in a stock investment class or tutorial to learn about the basics. Follow trends, news, and latest information about cannabis investing, so you’ll know how your investments will do at the end of the day.
7. Consider the Top Cannabis Stocks in the Market Today
Almost all of the biggest and most successful cannabis stocks are Canadian-based. This is because Canada was the first to legalize recreational cannabis. But now, some US-based cannabis stocks are worthy of checking out. Take note of these five top marijuana stock companies based in Canada and the US.
Constellation Brands – NYSE:STZ
Constellation Brands is a US-based marijuana grower but is also known for its premium-quality beers such as Modelo and Corona. This company invested in Canopy Growth NYSE: CGC a few years ago has placed it on the top of the global cannabis investment industry.
Canopy and Constellation created a formidable partnership as Constellation provides strong financial backing and has been proven to develop different consumer brands. Meanwhile, Canopy is one of the top firms in the cannabis industry for many years now. Canopy’s production capabilities are the highest compared to its many rivals.
Constellation’s investment in Canopy has paved the way for the cannabis company to conquer the US hemp industry compared to its rivals. Investing in Constellation lets, you enjoy the benefits of two industries as Constellation continues to lead the premium-quality beer market and to gain from the company’s cannabis markets.
KushCo Holdings – OTC: KSHB
KushCo Holdings is one of the top suppliers of packaging systems for the cannabis industry in the US. This company develops different packaging products, including tubes, bottles, and vape cartridges. These products are cleverly designed to meet the needs of cannabis growers as well as dispensaries.
KushCo’s sales are through the roof, but still, it remains to be profitable as it still invests in expansion. It is predicted that the company will eventually become sustainable and profitable as it focuses on growth opportunities in the US market as well as from different countries. At present, it has selected Europe and Canada for major growth opportunities.
KushCo may also benefit from the US legalization of hemp as some of their packaging products may be in higher demand. Also, KushCo Energy manufactures solvents that are needed for extracting CBD from weed.
OrganiGram Holdings – NASDAQ:OGI
OrganiGram Holdings is a licensed Canadian cannabis producer that focuses on therapeutic and recreational cannabis. The company has partnered with provincial corporations or government-owned businesses in Canada for recreational cannabis in the different provinces in Canada.
But OrganiGram is not just focusing its efforts in Canada, but it has also partnered with Alpha-Cannabis to rival large medical companies in Germany. OrganiGram also invested in Evianna, a hemp producer based in Serbia.
Despite not being the largest Canadian cannabis grower, its stocks are more impressive compared to its rivals. This company has consistent profits, and one of the reasons behind this would be its lower production costs. It may have a higher price-to-earnings ratio than other stocks; the value remains a bargain than other cannabis stocks. The value certainly looks very appealing when you compare the company’s annual production capacity/dollar compared to other, more prominent marijuana growers in Canada.
Innovative Industrial Properties – NYSE: IIPR
Innovative Industrial Properties is an ancillary service provider based in the US. It is also recognized as a REIT or real estate investment trust. The company owns properties that are leased to medical cannabis companies.
There are a lot of benefits to investing in Innovative Industrial Properties. It currently owns 10+ properties leased to eight companies. Take note that even if two or three customers of a REIT are unsuccessful, it can still manage to become successful.
Also, REITs must distribute a minimum of at least 90% of the company’s taxable income to its shareholders in the form of dividends. Therefore, Innovative’s dividends will continue to improve with its profits. And these profits are expected to grow as the company is leasing properties in 10 US states while four of these states are predicted to earn as much as $1 billion in 2022.
Origin House – OTC: ORHO.F
Origin House is a company that operates in the US but is based in Canada. This company began with royalty streaming or financing marijuana companies in exchange for cuts in their future earnings. Nowadays, Origin House distributes cannabis products as well as products bearing its name.
This Canadian-based company focuses on California as this state has the largest marijuana market anywhere. Origin house distributes marijuana products that can be purchased in almost 70% of cannabis dispensaries in the state.
Origin House is looking into other markets. It has acquired a Canadian company called 180 Smoke, a vape retailer. This acquisition has helped the company to expand to the Canadian recreational cannabis market further. Diversify your stock portfolio. It’s hard to separate winning companies from losers, so it’s just best to have a variety of cannabis-related companies in your basket. Always focus on the long run when investing in cannabis. This industry is prone to volatility, but you can’t worry so much about this. Don’t be distracted as fruitful opportunities may happen sooner than expected.