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Should I Be Investing in Cannabis Stocks?

Or: Can you make green on the green in 2019?

Everyone seems to want a piece of cannabis these days. Thirty-three states have legalized medical or recreational use, everybody’s grandparents are using CBD products, celebrities are putting their names behind weed brands, and investors say the industry is hot. But how hot? Like, gets-you-righteously-fucked-up hot, or is it more of a dang-Kevin’s-brother-sold-us-oregano-again ripoff? And how do you “invest in weed” anyway? Alongside Keith Speights, who covers the cannabis industry for the Motley Fool, a website geared toward the individual investor, we’re smoking out some answers.

So are cannabis stocks a worthwhile investment, or is it just hype?

Weed is everywhere; the media can’t stop talking about it. CBD, rightly or otherwise, has reached miracle-drug status. As for whether it’s actually worth investing in all of this, Speights says that in the past couple years, a lot of cannabis stocks have been sizzling hot, which always turns the heads of investors.

The possibly not-so-good news is that, according to Speights, some people compare cannabis to the dotcom boom of the 1990s, which eventually became an epic bust. In other words, some people think the pot bubble-burst is nigh. This sentiment is based partly on the fact that, at the end of the day, cannabis is a commodity, so there’s a fear that supply will soon exceed demand. A lot will depend on cannabis’ legal status in other countries around the world, too — more of which are legalizing it, or on track to.

What would I be investing in, exactly?

Speights breaks down the industry into growers, biotechs and ancillary providers. For an example of the latter, think Scotts Miracle-Gro: The old gardening-supply company got into cannabis-supply products in a big way, and now, Speights says, cannabis makes up about 47 percent of the company’s revenues.

Another example would be Constellation Brands, the beer conglomerate, which invested billions into a cannabis company, Canopy Growth, and is reaping the rewards. Basically then, if you invest in Constellation instead of Canopy Growth, you get the best of both worlds, Speights says: Constellation’s beer-market domination plus the boom in cannabis.

How do I know what companies to invest in?

Cannabis is, of course, still illegal in the eyes of the federal government. That makes its existence at least somewhat shaky, even if the chances of the government cracking down on the industry are remote for now. Other than that, however, the principles of investing in cannabis aren’t any different from investing in anything else. Speights recommends diving into the following topics, more information for which can be found on a company’s investor-relations webpage:

  • Read about a company’s management team.
  • Check out their track records and experience.
  • Review the company’s growth strategy.
  • See if the company has rivals, and how it plans to differentiate itself.

Lastly, see if the company is profitable! Here’s the thing about the cannabis industry: Most companies aren’t profitable yet. The industry is young, so this is normal, but learn about their path and timeline to becoming profitable, and see if all of this adds up and feels right to you.

How risky is investing in the cannabis industry right now?

“If you’re a conservative investor, this isn’t the way of investing in stock for you,” says Speights. “Investors who are going to put their money in a cannabis stock need to be aggressive.” The rule of diversification applies especially to volatile industries like this. In short, don’t put your kids’ whole college fund into weed (besides, they’ll spend it on that themselves, later). 

Speights says to think of it the way some people invest in biotech companies: Maybe the company doesn’t have a product on the market yet, but if they’re developing something with amazing potential, a lot of investors will go into it in case the drug gets approved and takes off. “If you’re aggressive and you’re willing to take the risk, you might want to give [cannabis] consideration,” says Speights.

Just remember, due to cannabis’ gray-area legal status, most of the U.S. companies (non-ancillary) can’t be listed on American stock exchanges like Nasdaq or the New York Stock Exchange. Canadian companies, however — and there are many in this industry — can, because of weed’s legality up north. This means you’ll find them on the American stock exchanges, but you’ll find a lot of them on the Canadian stock exchange, too, along with American cannabis companies. If a company isn’t on a stock exchange, their stock can be purchased over-the-counter — an online stockbroker or a human stockbroker can facilitate any of these kinds of purchases. 

Got any good stock tips?

Speights does! He’s shared tips and suggestions here

So what’s the future of cannabis?

Speights says that many cannabis-industry CEOs suspect that something will happen at the federal level sooner or later. If not federal legalization, then at least letting states determine its legality. Speights suspects this could even happen within the next two or three years.

And here’s another legal twist: Hemp, that plant that looks like weed but has very little THC (and whose fiber has a variety of uses, including in apparel, most appropriately in the form of Baja hoodies/drug rugs) is federally legal now. Senator Mitch McConnell, of all people, was a big proponent of putting it into the farm bill signed into law in December. This is important because hemp has all the CBD that marijuana does — and CBD, as you and your grandma both know, is huge right now. So keep an eye out for hemp stocks without those pesky concerns over legality.

Not gonna lie, I’m pretty high right now. Can you just give me the short, easy version?

You got it, champ. All in all, cannabis is a $16.9 billion industry this year, so if you’re thinking of getting in, get in while the gettin’ is good.