Pot Investment: Legal Ways To Invest In Cannabis

Investing in the marijuana industry is a risky business. Although the Biden administration has backed off from prosecuting marijuana businesses at the federal level, this could change with a new administration. Marijuana is still considered a controlled substance at the federal level, and the federal government can prosecute marijuana businesses and dispensaries operating in states where adult-use cannabis is legal. This means that, by investing in a marijuana company, you are investing in a business that faces the risk of prosecution.

However, the marijuana industry is growing rapidly. The global marijuana market is projected to grow to $102.2 billion by 2030. As of 2023, more than two-thirds of states allow some form of medical marijuana, and almost half have legalized recreational marijuana. With more states decriminalizing or legalizing cannabis, the industry is constantly evolving, and investors need to keep up to date with the latest laws and regulations.

If you are thinking of investing in marijuana stocks and cannabis exchange-traded funds, it is best to speak to an attorney familiar with the nuances of marijuana law to ensure you comply with the changing laws.

Understand the different types of marijuana products

There are two broad categories of cannabis products: medical marijuana and recreational marijuana.

Medical Marijuana

Medical marijuana is used for medicinal purposes and is legal in 38 US states, the District of Columbia, three US territories, and more than 40 countries. A prescription from an authorised healthcare provider is usually required for patients to obtain medical marijuana. It is often prescribed to adults for anxiety, depression, pain, and stress.

Recreational Marijuana

Recreational marijuana is legal in 24 US states, plus Washington, D.C., and several other countries, including Canada, Georgia, Germany, Luxembourg, Malta, Mexico, South Africa, Thailand, and Uruguay.

Marijuana Products

Marijuana can be consumed, inhaled, or applied to the skin. The method of use and THC content will impact how soon, how intensely, and how long its effects will be felt.

Inhaled Products

Inhaled products include loose flower, pre-rolls, and concentrates. Loose flowers can be rolled into a joint, placed into an emptied cigar, or put in a pipe or water pipe. Pre-rolls are loose flowers already rolled into a cigarette-like shape, sometimes with added cannabis concentrate. Concentrates are placed in and inhaled from a smoking or vaping device, such as a vape pen.

Consumable/Ingestible Products

Consumable/ingestible products include cannabis oils, extracts, edibles, capsules, tablets, and tinctures. Edibles are food and beverages infused with cannabis. Tinctures are cannabis-infused liquids placed under the tongue with a dropper or syringe.

Topicals

Topicals are applied to the skin and include lotions, ointments, balms, transdermal patches, and suppositories. Topicals that do not include THC are governed by different laws and can be sold in stores that are not licensed cannabis retailers.

Different Types of Cannabis

All cannabis products come from two (technically three) subspecies of cannabis plants: cannabis sativa, cannabis indica, or a hybrid of the two. Each subspecies tends to elicit different effects.

Sativa

Sativa products tend to produce uplifting and energizing "head highs" that can help with stress and anxiety, stimulate creativity, and focus the brain. They are often used during the day.

Indica

Indica products tend to have relaxing and relieving effects, helping with pain relief, lack of sleep, and lack of appetite. They are also known to produce euphoria and are often used in the evening.

Hybrid

Hybrid cannabis products utilise properties from both sativa and indica plants, producing a mixture of body and cerebral effects.

It is important to note that cannabis products don't always follow these rules, and some indica products can be energising, while some sativa products can have a mellowing effect.

Know the types of marijuana companies

When it comes to investing in marijuana companies, it's essential to be aware of the different types of businesses operating in this industry. Here's a detailed overview of the primary types of marijuana companies:

Cannabis Growers and Retailers

These companies are directly involved in the cultivation, harvesting, and distribution of cannabis products. They often operate indoor facilities and greenhouses to grow cannabis plants. Some of these businesses also run retail stores, selling medical and/or recreational cannabis directly to customers. Examples of publicly traded cannabis growers and retailers include Curaleaf Holdings, Trulieve Cannabis, Green Thumb Industries, and Canopy Growth Corporation.

Cannabis-Focused Biotechnology Companies

Biotechnology companies in the marijuana industry focus on extracting cannabinoids from marijuana to develop new pharmaceuticals. They leverage the medicinal properties of cannabis to create prescription drugs. Jazz Pharmaceuticals is an example of a company in this category.

Ancillary Product and Service Providers

These companies provide essential support to the marijuana industry without directly handling the plant. They offer a range of products and services such as hydroponics equipment, lighting systems, packaging materials, and management services. Ancillary businesses don't face the same legal risks as companies that directly handle marijuana. Examples of companies in this category include Scotts Miracle-Gro and Innovative Industrial Properties.

Marijuana-Focused Biotech Companies

These companies focus on the scientific and medical aspects of cannabis. They may develop cannabis-based pharmaceuticals, conduct research, or create synthetic cannabinoids for medicinal purposes. Abbvie Inc., for instance, markets Marinol, a synthetic cannabinoid prescribed to AIDS and cancer patients to help with vomiting and nausea.

Other Cannabis-Related Businesses

In addition to the primary types mentioned above, there are other businesses that operate in the cannabis ecosystem. These include companies that provide cannabis-related products and services but don't directly handle the plant. For example, Kush Bottles creates custom child-resistant containers for marijuana retailers, while Canna Flavors produces oil-soluble flavour extracts used in baked goods containing pot.

It's important to note that investing in the marijuana industry comes with unique legal and financial risks due to the federal illegality of marijuana in many places. Before investing, be sure to do your due diligence, understand the regulatory landscape, and consult with legal and financial professionals.

Understand the risks of investing in the marijuana industry

Investing in the marijuana industry comes with a unique set of risks that potential investors should be aware of. Here are some key risks to consider:

Legal and Political Risks

One of the biggest risks is the legal status of marijuana. In the United States, selling marijuana remains illegal at the federal level, despite a growing number of states legalizing its use for medical or recreational purposes. This creates a situation where companies are operating in a legal grey area, and federal policies can change at any time, affecting the industry as a whole. For example, the Attorney General can shift policies to be more anti-cannabis, as seen with Jeff Sessions' rescinding of the Cole memo in 2018.

Financial Constraints and Volatility

Many companies in the marijuana industry are young and face financial constraints. They often struggle to access critical financial services due to federal restrictions on banks dealing with marijuana-related businesses. This can lead to issues with cash flow and accessing capital, resulting in financial difficulties and potential dilution of shareholder value. The volatility of the industry, with stock prices swinging up and down, also adds to the financial risk.

Supply and Demand Imbalances

As a burgeoning industry, marijuana is prone to irregularities in supply and demand. As more companies enter the market, there is a risk of supply outpacing demand, which can lead to falling prices and revenue. This was seen in Canada, where marijuana growers initially expanded to meet recreational demand but later had to cut back on production due to oversupply.

Over-the-Counter (OTC) Stock Risks

Many cannabis companies trade on OTC markets, which means they are not required to regularly file financial statements. This lack of transparency makes it difficult for investors to assess the risk of these stocks accurately. OTC stocks are also often more susceptible to price manipulation.

Regulatory Uncertainty

The regulatory landscape surrounding marijuana can be complex and uncertain. As long as marijuana is federally illegal, marijuana companies will face challenges in opening bank accounts and securing funding. This results in many companies relying heavily on cash, which poses significant risks from a liability and accounting perspective.

Scam Artists and Fraud

The rising popularity of marijuana makes the industry a prime target for scam artists and fraudulent activities. For example, there have been cases of online scams where people were tricked into sending money for marijuana products that never arrived.

Data Breaches and Cybersecurity

The cannabis industry, particularly in its early growth stages, is vulnerable to hacking and data breaches. The sensitive nature of the information held by these companies, including healthcare data, increases the potential liability and risks associated with data breaches.

Theft

Due to the inability of many cannabis companies to obtain banking services, they often operate primarily in cash, making them a prime target for thieves. This has resulted in an increase in burglaries at dispensaries.

Investor Emotions and Volatility

The presence of emotionally driven retail investors in the marijuana stock market can lead to wild volatility in stock prices. Retail investors are more likely to allow their emotions to influence their buying and selling decisions, and the controversial nature of marijuana can amplify this effect.

Inexperienced Management

The marijuana industry is still relatively new and illegal in most countries, leading to inexperienced management teams at many companies. This inexperience can result in mistakes and poor decision-making, impacting the performance and stability of these businesses.

It is important for investors to carefully research and understand these risks before investing in the marijuana industry. While the industry holds exciting growth potential, it also comes with unique challenges and uncertainties.

Know what to look for in a top marijuana stock

When considering investing in a marijuana stock, there are several factors to take into account. Here are some key things to look for and research when evaluating a top marijuana stock:

• Research the management team: Look into the qualifications, experience, and track record of the company's leadership.
• Understand the company's growth strategy: Evaluate the company's plans for expansion, market penetration, and increasing revenue over time.
• Competitive position: Assess the company's position in the market relative to its competitors. Look for unique selling points, brand recognition, and market share.
• Scrutinize financial statements: Analyze the company's financial health, including revenue, profits, and debt. Look for consistent growth and a stable financial position.
• Warrants and convertible securities: Examine the number of warrants and convertible securities issued by the company. A high number could lead to dilution of shares and a potential drop in stock price.
• Cost of sales per gram: For marijuana growers, research the all-in cost of sales per gram, which includes all costs associated with producing cannabis.
• Cash cost per gram: Also, look at the cash cost per gram, which excludes amortization, packaging, and inventory adjustment costs.
• Prioritize lower-cost structures: Marijuana growers with lower-cost structures tend to be more competitive in the market.
• Vertical integration: Some companies cultivate, process, and manufacture their products, giving them more control over the process and potentially reducing costs.
• Regulatory compliance: Ensure the company follows state and local regulations regarding the marijuana industry.
• Brand recognition and market presence: Evaluate the company's brand strength and market presence. A well-established brand with a loyal customer base can be an attractive investment.
• Industry dynamics: Stay informed about the rapidly changing dynamics of the marijuana industry, including legal and political developments that may impact the company's operations.

Evaluate the top cannabis stocks and ETFs

When evaluating the top cannabis stocks and ETFs, it's important to consider various factors, including the company's financials, growth strategy, competitive position, and management team. Here's an evaluation of some top cannabis stocks and ETFs based on these criteria:

Curaleaf Holdings (OTC: CURLF)

Curaleaf Holdings is a cannabis grower and retailer with operations in multiple states. The company has a strong focus on retail and has established a significant presence in the industry. Its financials and growth prospects are worth examining, along with its ability to navigate the complex regulatory landscape.

Trulieve Cannabis (OTC: TCNNF)

Trulieve Cannabis is another leading cannabis grower and retailer. The company has a strong track record and has been recognised for its commitment to quality and compliance. Trulieve's management team has extensive industry experience, which could be a key advantage in this highly regulated market.

Canopy Growth Corporation (NASDAQ: CGC)

Canopy Growth Corporation is a well-known cannabis company with a strong brand. They have a diverse range of products and have established a solid supply chain. Canopy has also been expanding internationally, which could provide additional growth opportunities.

Tilray (NASDAQ: TLRY)

Tilray is a cannabis company that has gained attention for its focus on research and development. They have a strong pipeline of innovative products and have established strategic partnerships within the industry. Tilray's ability to bring new products to market could be a key differentiator.

ETFMG Alternative Harvest ETF (MJ)

This ETF provides exposure to a basket of cannabis stocks, offering diversification within the sector. It has a mix of Canadian and U.S. companies, giving investors access to a broader range of opportunities. The ETF's performance has been strong, outpacing the Global Cannabis Stock Index.

AdvisorShares Pure US Cannabis ETF (MSOS)

The AdvisorShares ETF focuses specifically on U.S. cannabis companies, including multi-state operators. This fund is actively managed and seeks long-term capital appreciation. Its performance has been solid, and it has a substantial asset base, indicating investor confidence.

Amplify Alternative Harvest ETF (MJ)

Amplify's ETF takes a global approach, tracking the Prime Alternative Harvest Index. It provides exposure to companies benefiting from medicinal and recreational marijuana legalization worldwide. This ETF has a strong asset base and has outperformed the S&P 500 year-to-date.

Innovative Industrial Properties (NYSE: IIPR)

Innovative Industrial Properties is a unique cannabis-focused real estate investment trust (REIT). They provide capital to the industry by acquiring and leasing properties to medical cannabis operators. This company offers a different angle for investors, focusing on the real estate aspect of the cannabis market.

Scotts Miracle-Gro (NYSE: SMG)

Scotts Miracle-Gro is an established company that has expanded into the cannabis industry. They provide a range of products and services to cannabis growers, leveraging their expertise in lawn and garden care. Scotts Miracle-Gro's diverse revenue streams could make it an attractive option for more conservative investors.

When evaluating these stocks and ETFs, it's essential to consider your risk tolerance, investment goals, and the dynamic nature of the cannabis industry. Conduct thorough research, monitor industry changes, and remember that past performance is not a guarantee of future results.

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