How to Invest in the Marijuana Industry

Over the past few years, 8 states have legalized the recreational use of marijuana for persons over the age of 21, and more states are likely to follow suit. There’s no fluke to this trend. Marijuana has already been scientifically proven to be less harmful, both to users and others, than alcohol or any other illicit substance (see Scientific American: Experts Tell the Truth About Pot). This does not mean it’s completely harmless, but the data and research have provided enough basis for several states to legalize and regulate its recreational use. In states where it is legal, it’s become a huge business and an excellent source of tax revenue. For example, in Washington State, marijuana sales translated to $341 million in excise tax in 2017 alone.

How to Invest in the Marijuana Industry

This is exciting news for investors who see the massive potential. However, many issues with legality still exist. As a result, the majority of the market operates predominantly in the medical marijuana or biopharmaceutical space and is comprised of smaller companies not yet big enough to trade on the main exchanges. This can often pose added risk for an investor looking to step into this arena. The four main outlets for investors include pure-play marijuana stocks, pharmaceutical companies, cannabis ETFs, and companies with exposure to the marijuana industry. Let’s take a look at each of these and how to invest in the marijuana industry.

Pure Play Marijuana Stocks

“Pure play” simply refers to a company that focuses exclusively on one specific industry or product. A coffee shop may call itself a “pure play’ restaurant, for example. In the marijuana industry, this would refer to a company solely focused on the production or distribution of marijuana products. Many of these are Canadian companies that trade on U.S. over-the-counter exchanges, such as Canopy Growth Corp (TWMFJ).

Canada has a thriving medical marijuana market with Canopy Growth possessing the highest individual market share. They have their hands in every aspect of the supply chain, from growing to manufacturing cannabis-infused products to even selling to consumers. They are also in the midst expanding their operations both domestically and abroad. Domestically, they’ll be making their foray into the recreational market once its legalization takes effect in Canada in July of this year. Abroad, they already export medical marijuana to countries such as Spain, Jamaica, Denmark, and Germany, where its medicinal use has been legalized. This is certainly some enticing potential for investors.

It’s important to note, however, that due to the fact that most of the pure-play stocks trade on the over-the-counter exchanges, they are not subject to the same level of regulatory oversight as companies that trade on the main exchanges. From an investor standpoint, this means higher susceptibility to fraud and volatility. These companies also face three major risks:

  1. Companies that sell federally illegal substances are disallowed from taking normal business deductions. This means companies pay tax on gross profits instead of net income, leaving the few that are profitable with less leftover to pour back into the business; and
  2. Many are unable to secure basic banking services due to the risk of fines and/or criminal charges for federally insured banks; and
  3. Under the Trump Administration, there’s concern for government crackdown on the industry.

Investing in individual marijuana stocks is a very risky business right now,  investors should always use the utmost caution and care with their due diligence before picking specific marijuana stocks to invest in.

Mainstream Pharmaceuticals Companies

Investors looking for more mainstream opportunities can invest in pharmaceutical companies that trade on the main exchanges and have at least one or more cannabis-based products on the market. Companies like AbbVie Inc. (NYSE:ABBV) and Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) both fall in this category.

Neither of these companies focuses exclusively on cannabis-based products and both are large companies. With their more diversified business lines and larger scale, these companies aren’t as exposed to the direct risks associated with the marijuana industry like the smaller, pure-play companies are. As a simple example, if medical marijuana became illegal tomorrow, AbbVie likely wouldn’t be pushed out of business as a result.

Marijuana ETFs

For those not familiar with ETFs, the acronym stands for “exchange-traded fund”. They are simply a basket of stocks that track a specific index (e.g. S&P 500 or Dow Jones Industrial Average) and trade on the open market like individual stocks. In April of 2017, the first medical marijuana exchange-traded fund made its debut on the Toronto Stock Exchange. The fund is called the Horizons Medical Marijuana Life Sciences ETF (HMMJ) and it tracks the North American Medical Marijuana Index. With 14 holdings in predominantly marijuana-focused pharmaceutical companies, this ETF presents an interesting option for investors looking for exposure to the industry. However, the marijuana industry is still facing many issues with legality and its ability to scale, so until it is able to overcome those challenges, a marijuana ETF will remain a questionable play.  

Companies with Exposure to the Marijuana Industry

The last main avenue we’ll explore are companies operating indirectly in the space. This includes companies like Scotts Miracle-Gro Co (NYSE:SMG) and Cree, Inc. (NASDAQ:CREE). Scotts Miracle-Gro Co, for example, is exposed by way of their hydroponics and pesticide business lines that are used in the growing of marijuana. Cree, Inc., on the other hand, manufactures LED lights that can be used as an alternative to the traditional, but much less eco-friendly high-pressure sodium grow lights. With the challenges still facing investors looking for opportunities in the marijuana industry, this avenue certainly poses a viable alternative for adding some exposure to your portfolio without as much risk.  

The marijuana industry certainly presents an interesting opportunity for investors. There’s no doubt there’s a tremendous amount of room for growth and development. However, due to the uncertainties and lingering issues with legality, it still has a long way to go before it will ever become a core industry in a diversified portfolio. For those interested in adding marijuana to your portfolio, avenues do exist. Investing in this industry should be done with a thorough understanding of the risks involved and a high degree of caution when making your choices. Remember, diversification is key!

If you’d like to learn more about how to invest in the marijuana industry, particularly here in Washington State, and what it may mean for the future. Or, you’d simply like a review of your current portfolio, feel free to schedule a free consultation today. 

Disclosure: Millennial Wealth is an Investment Adviser registered with the State of Washington. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. We do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. The information provided is subject to change without notice.

Chad Rixse grew up in Anchorage, Alaska, but has lived in the Seattle area since 2007. He majored in Spanish at the University of Washington where he honed his fluency in the language and discovered his passion for travel and connecting with other cultures. He’s a self-professed golf addict who can never seem to get his fill despite still struggling to break 100.