Investing in Cannabis Stocks 101

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American cannabis stocks continue to draw the interest of investors as recreational legalization becomes increasingly widespread at the state level. Celebrities are creating their own cannabis brands, nearly 20% of people in the U.S. report having tried CBD and the industry itself is expected to top $30 billion annually by 2025. It appears that this green business has gotten the green light from consumers and keen investors alike.

That said, despite the initial assumption that cannabis would prove a booming industry, reality has yet to deliver on many early investors’ hopes. If you’re considering investing in cannabis, it’s a wise idea to explore the reasons why individual cannabis stocks have been slow burners on the market — and to look into alternative ways you can invest in cannabis (without buying cannabis stocks).

Here’s Why Cannabis Stocks Have Had a Slow Start

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Over the past few years, several publicly traded companies have emerged as potential top contenders in the cannabis industry. During the initial days of cannabis company trading, research, cultivation, processing and distribution companies like Tilray (TLRY), Cronos Group (CRON), Canopy Growth (CGC), Aphria (APHA) and Aurora Cannabis (ACB) all drew substantial interest, if not earnings.

Jump to 2021, and the list has become a bit more selective. Tilray and Aphria have since announced a merger, generating hopes among many investors that the two previous rivals will create a winning combination. Newcomers Terra Tech (TRTC) and Sundial Growers (SNDL) have generated considerable interest, though the valuations of both are still well within the penny stock range.

So why are cannabis stocks struggling? This is happening for several reasons, including:

  • Legalization concerns: The fact that cannabis has yet to be legalized at a federal level means that many banks can’t invest in them or recommend them to investors. However, this may change if Congress and the Senate approve the SAFE Banking Act, which is aimed at providing “a safe harbor for depository institutions seeking to serve legitimate cannabis-related businesses in states where such activity is legal.”
  • Speculation: The cannabis industry is still relatively new to the market, with almost all individual stocks falling into the penny stock category, a traditionally tricky zone for serious investors.
  • Foreign stocks: Many of the larger cannabis stocks currently trading are from foreign markets, which may limit access to financial data and little protection in the case of fraud.

Should You Invest In Marijuana Stocks?

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One of the biggest challenges in investing in individual U.S.-based cannabis companies so far is that none have really taken off substantially or emerged as clear leaders. Even if the government decides to pursue federal legislation with the SAFE Banking Act that facilitates an easier entry into investing in cannabis companies, the future of the cannabis industry may remain somewhat difficult to determine — this industry is young, after all.

So what’s a potential investor to do? Buying exchange-traded funds (ETFs) can be a good strategy for diversifying your investment instead of putting all your eggs into one proverbial basket by selecting one company to focus on. ETFs track a particular group of stocks, commodities or other assets and rise and fall based on the pricing of their collective value. 

There’s currently a wide variety of cannabis-adjacent ETFs that can allow you to gain wider exposure to more cannabis companies rather than hedging your bets on any one company in particular. Some of the most popular cannabis ETFs worth watching include these options.

AdvisorShares Pure US Cannabis ETF (MSOS)

Think cannabis has a definite future, specifically in the United States? If so, then MSOS is a solid choice to add to your watch list. MSOS is the first actively managed U.S.-listed ETF that focuses exclusively on companies operating in the United States.

Amplify Seymour Cannabis ETF (CNBS)

CNBS is an interesting play that can also give you a wide range of exposure to various cannabis companies, including companies based in the U.S., U.K. and Canada. 80% of its holdings are in companies that earn at least 50% of their revenue from either cannabis or hemp-related products. These companies include not only pharmaceutical and biotech companies but also those involved in the agricultural cultivation and retail sides of the cannabis industry.

Spinnaker Cannabis Series ETF (THCX)

THCX was introduced to give investors exposure to a basket of international companies that profit from legal cannabis, hemp, wellness and CBD-based revenue. This ETF gives you access to a broad range of holdings that includes names like Chronos, Tilray and Charlotte’s Web, among others.

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Even if you aren’t ready to take the plunge and invest in individual cannabis companies, there are still plenty of ways to get in on the industry. Many of these opportunities take the form of companies that produce products that are essential for cannabis growers. A few strong examples include the following.

GrowGeneration Corp. (GRWG)

While GrowGeneration isn’t a cannabis grower or supplier, it is the largest hydroponics company in the U.S. A distributor of agricultural products ranging from farming soils to lighting to aquaponics equipment, GrowGeneration’s success doesn’t necessarily depend on the cannabis industry but certainly stands to profit from it.

Innovative Industrial Properties (IIPR)

IIPR is an interesting choice simply because it’s more of a rarity in the cannabis industry. It’s actually a real estate investment trust, or REIT, that provides real estate capital for greenhouses and other facilities used for the large-scale growing of medicinal cannabis.

Scotts Miracle-Gro (SMG)

SMG is a company that you’re likely already familiar with due to its long-standing reputation for selling lawn, garden and pest-control products. It’s of interest to cannabis investors largely due to the fact that, in 2018, SMG acquired Sunlight Supply, a huge U.S.-based hydroponics distributor. Not only is SMG a strong choice when it comes to cannabis growth products, but the company’s value has also skyrocketed due to the uptick in gardening interest during the COVID-19 pandemic.

Alternative Cannabis Investment Strategies

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If you’re feeling adventurous, check out these other investment opportunities in the cannabis industry.

Silver Spike Acquisition (SSPK)

SSPK isn’t your traditional investing setup because it’s something known as a special purpose acquisition company, or SPAC. SPACs are sometimes referred to as “blank check companies” and are usually formed by experts in a certain field. The purpose of an SPAC is to help these experts raise money that they’ll then invest in various acquisitions — though the particulars of their goals aren’t revealed to investors. SSPK is targeted around U.S. cannabis companies, although it maintains the right to seek out international opportunities if they should present themselves.

Cannabis ETNs

Exchange-traded notes, or ETNs, are a lesser-known investment strategy and come with their own set of pros and cons. ETNs are, in essence, unsecured debt notes that, much like bonds, can either be held to maturity or sold like stocks. Unlike ETFs, ETNs don’t buy or sell underlying assets, which means that, again unlike ETFs, you don’t need to pay capital gains taxes on this type of investment until you sell it off. This can make ETNs a solid-long term play, though they do come with higher risks than traditional ETFs. Examples include:

MicroSectors Cannabis ETNs (MJJ): MJJ sells unsecured notes under the Bank of Montreal. Its index tracks publicly traded U.S. and Canadian companies that provide medical and industrial cannabis products.

MicroSectors Cannabis 2X Leveraged ETNs (MJO): MJO is similar to MJJ in that it tracks the performance of North American cannabis products through the Indxx MicroSectors North American Cannabis Index using unsecured notes through the Bank of Montreal. The biggest difference is that this is a leveraged 2X ETN, which means that returns are magnified by a 2:1 ratio. The downside is that losses are subject to the same magnification.