10 Questions You Need to Ask Before Investing in Marijuana Stocks

Marijuana Stocks Overview

Weed is quickly shaking its taboo status. Until very recently, this “sin substance” has been kept in the shadows. But the rise of marijuana stocks has been changing everything. Legalization is sweeping across the nation.

Many investors are excited (rightfully so) about this opportunity to multiply their money. Those who invest in pot stocks could easily make 200% or 300% within one year. Many already have.

But before you rush off to invest in every marijuana stock you can get your hands on, remember to ask yourself the essential questions about investing in cannabis stocks.

This is a young industry with plenty of room to grow; estimates peg marijuana sales at $50.0 billion per year by 2026. (Source: “Marijuana industry could be worth $50 billion annually by 2026,” MarketWatch, April 22, 2017.)

This opportunity is as clear as day, but many forecasts are constrained by politics. While the political mood is changing, there’s still a long way to go before total marijuana legalization becomes politically feasible in the U.S. and many other countries.

So, before you empty your savings account, ask yourself the following 10 questions.

1. What Are the Risks of Marijuana Investing?

Investing in marijuana stocks is not a sure thing. There is risk involved in any investment, and people should know that. Pot stocks are no different than any other asset class in this regard. No risk, no reward.

There is arguably more volatility with cannabis stocks due to the age of the industry. This means that wild swings are more likely.

And then there’s the political risk surrounding the industry.

While the Agriculture Improvement Act of 2018 legalized hemp and has led to legalization of cannabidiol (CBD) throughout the U.S., the federal government still considers the drug among the most dangerous ones.

Cannabis is, after all, still a Schedule I drug under the Controlled Substances Act in the United States. This means it is illegal at the federal level.

So how are marijuana companies flourishing in states like Colorado and Oregon? Shouldn’t the FBI or the Drug Enforcement Administration (DEA) shut them down? The answer is a complicated, but it boils down to a hard “no.”

After several states legalized recreational weed, the Department of Justice (DOJ) issued a directive on drug enforcement. It basically permitted the commercial sale of marijuana, albeit under tight restrictions. The states took this policy and ran with it.

But if the DOJ starts singing a different tune, marijuana companies could be at serious risk.

For a long while, the federal government’s position on pot has been to stay out of the way of the states that choose to legalize pot. That policy has been great for U.S. pot stocks, and it could morph into full-on support for legalization.

The fact of the matter is that the future is leaning toward federal legalization; 33 states have legalized medical marijuana and 11 states plus D.C. have legalized recreational pot. And more states are likely to join that number in the near future.

2. Are Marijuana Stocks Safe?

As part of an emerging growth sector, cannabis stocks are not advisable for conservative investors.

However, “safe” is a relative term. If you are an adrenaline junkie who’s been skydiving for years, then one more jump feels pretty safe. It’s just one out of a hundred, right? But for others, jumping out of a plane seems borderline insane.

This relativism in terms of safety applies to the stock market perfectly. High-risk investors know that many of their bets will go bust, but they only need one big winner to make up for it. So to them, emerging growth stocks are “safe” to them.

But if you cringe at a 0.1% drawdown in your portfolio, then you might want to steer clear of pot stocks.

3. How Can I Invest in Pot in the U.S.?

Investing in marijuana stocks can be done on public stock exchanges or over-the-counter markets (OTCMKTS).

There is a growing presence of cannabis stocks on the Nasdaq and the New York Stock Exchange (NYSE), but many of these stocks are still traded over the counter in the U.S. (and are available on Canadian exchanges).

Types of Marijuana Stocks

There are a few different corners of the weed market. For example, there are medical marijuana stocks, recreational pot stocks, marijuana producer stocks, marijuana retailer stocks, and marijuana services stocks.

Medical marijuana companies are involved in the development, patenting, and distribution of cannabinoid-based pharmaceutical drugs. These drugs are used to treat anything from cancer to chronic pain.

Marijuana producers grow and manage the plants, which is what most of us probably think of when we hear the words “marijuana stocks.” These companies often sell their products directly to consumers.

Marijuana services companies lend support to companies in the categories above. Whether by providing real estate or social media services, many of these companies are growing rapidly. Perhaps ironically, their success is partly due to the U.S. federal ban on marijuana. Because other firms are scared to do business with weed dealers, these services companies have been able to carve out a niche.

4. How Are Marijuana Companies Taxed?

Taxation is the downside of the federal ban on marijuana. IRS Code 280E allows Uncle Sam to tax a marijuana company’s sales minus the “cost of goods sold.” In other words, the government counts gross profit, not net profit, as taxable income.

To the best of my knowledge, this doesn’t happen to any other type of business in the United States. That means everything from marketing costs, to research, to debt payments are not taken into account. The government is squeezing them for every possible cent.

States also often levy their own taxes on marijuana, inflating the prices of legal weed. This is a contentious issue that has helped sustain the black market. If these taxes were lowered to more manageable rates, we could expect to see surges among marijuana stocks.

5. Can Marijuana Companies Get Bank Accounts?

For a long while, the marijuana trade—even in states where it’s legal—was an all-cash business. That’s because the federal ban on marijuana sales had spooked a good number of banks from holding revenue derived from pot. Theoretically, that cash could be seized by the feds at any time.

There is, however, no precedent for that and it seems unlikely to ever happen. Still, it’s a risk that many banks have opted to avoid.

Having said that, there has been some very tangible progress on this front at the federal level. The SAFE Banking Act was passed in the House in 2019. If the bill is passed in the Senate, that would effectively allow banks to operate without fear when handling marijuana revenue. It would be a huge win for the pot industry.

6. Is Donald Trump in Favor of Marijuana Legalization?

In the past, President Donald Trump has spoken negatively about marijuana use and marijuana legalization. But his administration seems to have drawn several lines in the sand, including one between medical and recreational uses. The other line is between state and federal authority.

“I think it’s up to the states,” said Trump in 2016. “I’m a states person. I think it should be up to the states, absolutely.” (Source: “Brandon Rittiman’s Trump interview transcript,” 9NEWS, August 3, 2016.)

This perspective is historically in line with the Republican party. The GOP has traditionally preferred that states govern themselves as much as possible, so that local values can overrule the bureaucrats in Washington D.C.

As it happens, maintaining states’ rights when it comes to marijuana laws could be good for investors.

If marijuana companies simply grow on a state-by-state basis, they will soon become a regular feature of American commerce. To the general public, pot dispensaries might become as normal as liquor stores. That would reduce the stigma and restrictions placed on the weed industry.

And this question may become moot soon. The 2020 presidential election has several prominent Democratic Party front runners promising to legalize marijuana across the country. In 2021, we could see a president in the White House pushing for federal marijuana legalization.

7. Are There Other Countries to Invest In?

Canada is a fast-growing market for marijuana companies now that the drug has seen full-scale legalization in the country. Additionally, investing in Canadian marijuana stocks helps hedge against U.S. political risk.

Germany has also begun to show promise. Marijuana companies have been flocking to one of the largest markets in the world, hoping to set up foundations as the medical marijuana (and potentially recreational pot) sector expands.

Recently, we have seen progress around the world, with legal marijuana operations starting up in several areas, including Australia, Jamaica, and many parts of Europe.

8. Is It Too Early to Invest?

The marijuana industry is in what I would term the “adolescent” phase of its growth.

While the extreme surges of the sector’s very early days are likely gone for the next while, we can still expect to see 100% or even 200% stock growth as the industry continues to expand.

In fact, this is the safest the industry has ever been.

While the gains may not reach 500% again, there’s a good chance that marijuana stocks will double or triple in value when countries like the U.S. expand their legalization of pot.

In the meantime, much of the danger that was present earlier in the cannabis stock market has disappeared. There will still be ups and downs, but momentum is building toward another huge surge in the pot sector.

9. What Are the Biggest Marijuana Stocks?

Here are five of the biggest pot stocks by market capitalization (as of this writing):

(Source: Yahoo! Finance, last accessed January 9, 2019.)

However, any of these cannabis stocks could double or even triple at any time, so this list could be flipped on its head.

Once again, it’s important to remember that marijuana is an emerging growth industry, so nothing is locked in place for long.

10. Should You Invest in Marijuana Stocks?

It depends. I can’t stress this enough: only you know how much risk you can tolerate.

To be sure, there are pot stocks that have surged by more than 300%. Some investors have already walked away from marijuana stocks as millionaires, but this path isn’t for everyone.