Emerging sectors like the cannabis industry have often attracted investors hoping to be among the first to capitalize on the potential growth and high returns of what they believe are untapped markets or products that may be popular in the future.
While it’s true that some new sectors have been successful for some investors, such as those who invested early in internet-based companies, the chase for the next big investment can lead investors to speculate on trends and bet on industries and products with no proven record or history of success.
The cannabis industry particular has grown quickly in recent years as a number of jurisdictions, including Canada and certain U.S. states, have explored new laws around the sale and use of cannabis. In Canada, this initially began with the legalization of cannabis for medicinal purposes, which prompted a number of companies to express interest in entering the market and approaching investors who were keen to get in on what they believed was the next big thing.
Cannabis regulation in Canada may continue to evolve over time as the federal government plans to legalize its recreational use. Because of this, many cannabis companies are promising investors the opportunity to capitalize on the potential for considerable future growth. A number of companies are looking to expand into the U.S. where some states have authorized sale and use of cannabis for medicinal or recreational purposes, even though it remains prohibited at the federal level.
Investing in a cannabis company comes with a number of risks that could negatively affect an investment at any time. There remains a large amount of uncertainty in this emerging sector, especially as laws and business models continue to evolve.
Marijuana has come a long way since California legalized cannabis for medicinal use back in 1996. Today, the industry and marijuana look to be on the cusp of unprecedented acceptance, with major international giants investing billions into publicly traded cannabis companies. So let’s take a look at what investors need to know about the marijuana industry and how to invest in the future of pot.
How & Why to Invest
The ability to invest in pure-play marijuana companies is still very limited, with the only real options at the moment coming from Canadian-based firms. Some of the biggest pure-play marijuana firms are Cronos Group CRON, Canopy Growth CGC, Tilray TLRY, and Aurora Cannabis ACBFF, along with a marijuana-based ETF called the ETFMG Alternative Harvest ETF MJ.
Investors will notice that some of these stocks have soared over the last month on the back of Canadian legalization and a wave of seemingly more legitimate investors that want to buy in on the industry at what could easily be its lowest point. The idea here is pretty simple: invest before marijuana really booms.
Treat marijuana stocks like any other stock you’d consider buying. Research the management team, examine the company’s growth strategy and competitive position, and check out the company’s financial status. If the business isn’t profitable yet, you’ll want to make sure the company’s cash position, which includes cash, cash equivalents, and short-term investments, is enough to fund operations well into the future. If it isn’t, the company could have to raise additional cash through a stock offering — those additional shares will make the value of existing shares decline — or borrowing (higher interest costs could place a financial strain on the business).
There are unique factors for the marijuana industry that you also should look into for certain stocks. For stocks of marijuana growers, find out about their “all in” cost of sales per gram and their cash cost per gram for producing cannabis. The “all in” cost of sales per gram includes costs of producing cannabis, while the cash cost per gram excludes amortization, packaging costs, and inventory adjustments. Companies with lower costs will be in better shape to compete in times when supply exceeds demand.
Could the green rush be the next gold rush? In the last few years, perhaps no other sector except technology has generated so much–well, buzz.
The marijuana industry is expected to add 200,000 new jobs in the U.S. by 2020, according to New Frontier Data, which provides research on the cannabis market.
Growth is expected for a long list of businesses, such as the cultivators and packagers of the plants, dispensaries for medical and recreational marijuana, not to mention companies creating products that use cannabis byproducts called CBDs. CBDs are non-pyschoactive derivatives of cannabis, which can be used for a variety of purposes. Health professionals have touted CBDs for their ability to help patients with inflammation, chronic pain, and depression.
Companies are also capitalizing on industrial uses for cannabis. This includes the production of hemp, which can be used to make fabrics and textiles, as well as its use as additives to health food and body care products.
There are now 29 states that allow doctors to prescribe cannabis for medical purposes, which can include helping to alleviate nausea related to chemotherapy, and stimulation of appetite for people who are chronically ill, among other health-related issues.
And it all makes for big business. Total legal sales of cannabis were about $10 billion in 2017, and are expected to grow to $24.5 billion by 2021, according to reports.
In January, California became the largest state in the U.S. to allow its residents to use marijuana for recreation, with a market of nearly $4 billion in 2018, according to reports. Eight states and the District of Columbia have in recent years legalized cannabis for recreational use.
“The U.S. is creating the first truly scalable cannabis industry, and the rest of the world is looking at what is taking place,” says David Rheins, the chief executive and co-founder of the Marijuana Business Association, a trade group based Las Vegas, devoted to the cannabis industry and cannabis business owners.
Despite all the excitement surrounding the sector, the cannabis sector still faces challenges. And while attitudes are changing regarding legalization, there are still issues surrounding marijuana and the law.
U.S. federal law still considers marijuana use and possession to be illegal.
In January 2018, for example, the U.S. Department of Justice reversed an earlier policy of non-interference in states that have legalized marijuana. That could make things more complicated for growers and sellers in these states.
As of 2018, banks, which are federally regulated, still can’t accept money from cannabis businesses.
Because of this, many budding companies may struggle to create bank accounts, accept debit and credit payments, and effectively navigate the tax system. Businesses in California and Colorado report challenges of dealing with a cash-heavy industry where the laws and regulations are slowly changing, but remain cloudy and unclear.
Nevertheless, lawmakers seem to be working slowly toward a resolution.
The Congressional Cannabis Caucus, a bipartisan group of senators and representatives, hope to resolve the conflict between federal laws that ban marijuana use, and the state laws that allow it.
Also in January, attorneys general from 19 states including Hawaii, Alaska, and Colorado sent a joint letter to members of Congress, urging them to introduce legislation that would allow legal marijuana businesses to access banks and other financial services companies in the U.S.
And momentum seems to be with the industry, especially as it’s already providing important tax revenue to states–since legalizing marijuana, Colorado has pulled in $500 million in tax and related revenue, according to reports. And that could ultimately add billions to federal coffers too.
Investors in the U.S interested in adding cannabis to their portfolios have a few options. They can purchase shares of stock in cannabis-related companies that are publicly-traded on an exchange.
Another option is to purchase shares of a fund, which offers exposure to many companies leading the way in this growing sector.
Investing in Cannabis: Single stocks
A single stock is just that, a share of of ownership of a company. For example, investors can purchase shares of stock in companies like Cronos Group or CanniMed.
Investing in Cannabis: Exchange-traded funds
Exchange-traded funds (ETFs) are a basket of investments bundled into a fund that’s traded on an exchange like the Nasdaq or NYSE.
That fund owns the stocks within it and generally tracks an index – or group of investments that represent part of an industry or investment theme.
When you invest in an ETF you are effectively buying small fractions of the companies within that ETF. The fraction depends on the weights stocks held in that fund.
ETFs have become popular in recent years as they give investors the opportunity to invest in the performance of a group of stocks without having to buy every single stock in the fund or handpicking single stocks. Not only can this save time and research, ETFs can offer diversification, which many consider to be an essential investing strategy.
Stash is a financial services platform that makes saving and investing available to everyone through education, personalized guidance, and mobile-first technology. Stash speaks to a tech-friendly audience, providing user-friendly education, and personalized guidance.
Stash is for everyone
Stash is for the millions of Americans who have been overcharged and underserved by traditional banks, brokers, and investment advisors. Stash is for people who want to take charge of their financial future but need a helping hand to get them started and see them along their journey.
If you are a U.S. citizen, permanent resident, or a certain visa holder, and are 18 years of age or older, you can sign-up for Stash here.
What Are Our Fees?
Stash charges its customers $1 a month to maintain an investment portfolio for accounts with an average monthly balance below $5,000. For average monthly balances of $5,000 or more, the fee adjusts to 0.25% of the total balance you have in the account per year, charged on a monthly basis.
If you decide that a retirement account like a traditional or Roth IRA is suitable for your investing goals, you can open a tax-advantaged account with as little as $15. The fee is $2 a month for accounts with an average monthly balance of less than $5,000 or 0.25% per year, charged monthly, for accounts with an average monthly balance of $5,000 or more.
How is Stash Regulated?
Stash is as an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). The SEC is a federal agency that regulates the financial securities market, including exchanges, brokerage firms, and investment funds.
The SEC requires investment advisers, including Stash, to act in the best interests of their customers. It also regulates other financial services companies and requires them to provide customers with clear information about potential investments. It also guards against fraud and deception by financial services firms. (Note: Registration with the SEC does not imply a certain level of skill or training.)
You can find more about Stash on the SEC’s website at: adviserinfo.sec.gov, or simply click here to find out more about Stash and its registration with the SEC.