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What Are Cannabis Stocks?

The legal cannabis market is projected to be worth over $73 billion by the year 2027, with the value more than doubling between now and 2025 alone. And as cannabis is legalized across the nation, entrepreneurs and investors alike have flocked to potential profits found in cannabis-related business opportunities and securities on (mostly Canadian) stock exchanges.

But federal indecision on how – or whether – to decriminalize marijuana has led to a patchwork of multi-billion-dollar markets where enormous “unicorn” companies compete against hordes of startups. While such piecemeal regulation (and the oscillating specter of federal legalization) leads to incredible market volatility, it also provides investors with a chance to hop into a darling industry early and ride that volatility to the top.

What is the legal cannabis market?

Marijuana use is characterized as having one of two motivations: medicinal or recreational.

Medicinal users have a recommendation or prescription from a medical doctor to use cannabis and extracts to treat health conditions.

On the other hand, recreational users purchase marijuana for enjoyment and have more stringent restrictions, such as a minimum purchase age (usually 18 or 21) and residing in or visiting a jurisdiction where recreational use is legal.

The distinction (and regulatory differences) between medical and recreational marijuana is defined and enacted by the legalizing state. And though cannabis remains illegal federally, growing legalization by local governments has led to booming growth in legal markets, which in turn translates into impressive growth by companies that get in on the ground floor and take advantage of the new markets.

But if federal regulation does come around, it’s unlikely that this hunger for THC products will continually fuel explosive growth. In fact, Canadian markets – which have had legal marijuana nationwide since 2018 – are already seeing a shift to supplies that outpace demand, which lead to falling marijuana and cannabis stock prices.

In other words: if you want to be successful investing cannabis stocks, you’ll likely have to get in on the ground floor… or resign yourself to the long haul.

You can divide the marijuana industry into three categories:

  • Growers and retailers cultivate, package, and sell cannabis products to consumers
  • Biotech companies develop and sell cannabis-based pharmaceutical drugs and therapies
  • Ancillary businesses provide products and services to help these industries succeed – without ever taking a toke themselves

What are cannabis stocks?

Cannabis stocks are issued by companies that participate in any cannabis-related ventures, be it directly or indirectly. But as a trendy, budding industry with lots of press and growth potential, it can be difficult to tell the legitimate or worthwhile stocks from the scams and the duds. So how do you tell the haves from the have-nots in a new industry plagued by questions of legality?

You can start by considering the numerous – but not insurmountable – challenges presented by the industry.

One particular concern with cannabis stocks is the fact that you can’t rely on decades of financial reports, technical indicators, or peer performance. Nor can you look to stocks with big balance sheets, as even companies that have grown exponentially are not guaranteed future performance.

In fact, you might look at cannabis stocks as startups with unusually bloated balance sheets and cash flows. And while larger startups are more likely to have the funds for investing in new grow hubs and dispensaries, federal law also prohibits federally regulated banks from lending to cannabis companies, thereby limiting outside financing opportunities.

Other challenges include limited tax deductions and the presence of limited licensing opportunities in some states, which leads to a first-come-first-serve model in select markets – and a free market free-for-all in others.

Lastly, it’s essential to recognize that federal legalization will allow cannabis companies to grow and spread into new markets and across state lines. Over time, this will force firms to change their business models – likely flooding some markets and leaving others woefully unsaturated.

All of these challenges mean that cannabis is likely to remain a volatile industry for the foreseeable future. And with long-term volatility comes high risks – and the potential for high regards for aggressive investors willing to take a chance.

How to invest in cannabis stocks

Once you’ve decided that investing in cannabis stocks is for you, the next step is to know where to start.

One place is with individual stocks in one of the three major marijuana industries: growers and retailers, biotech companies, and ancillary firms.

For instance, if you want to get directly involved with marijuana production, you could seek out “blue chip” cannabis stocks: large, somewhat stabilized firms with healthy bottom lines, large cash infusions into growth potential, and plenty of growth under their belt.

Companies that have an affiliation with the industry and established revenues in other avenues are another potential investment. For example, a number of manufacturers and retailers dealing in hydroponics equipment, fertilizer, and even “head shop” products have proven profitable in recent years.

And of course, you can invest in pharmaceutical companies researching cannabis products. One such example is GW Pharmaceuticals, the only company with an FDA-approved, cannabis-based drug on the market.

Disclosures offers advisory services through Quantalytics Investment Advisors, LLC ("QIA"), a Registered Investment Adviser. This is solely for informational purposes. Advisory services are only offered to clients or prospective clients of QIA . Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. Comments by viewers or third-party rankings and recognitions are no guarantee of future investment outcomes and do not ensure that a client or prospective client will experience a higher level of performance or results. Adviser has reasonable belief that the content posted by a Third Party does not contain untrue statements of material fact or misleading information regarding its advisory services.

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