Investing in Pot: Are Marijuana Stocks a Safe Investment?

Are Marijuana Stocks a Safe Investment?

Nothing was as hot as marijuana stocks were in the lead-up to the October 2018 legalization of recreational cannabis in Canada. In fact, it was difficult to find a pot stock that wasn’t doing well.

It didn’t matter if a marijuana company had any revenue or cash on its balance sheet; its shares were trending higher. Many cannabis stocks soared in excess of 400% in the run-up to legalization in Canada.

Stories of untold riches to come and investors’ fears of missing out pushed marijuana stocks even higher in the first quarter of 2019. Many investors believed the momentum would continue throughout 2019, but that year was not kind to pot stocks.

With 2019 in the rearview mirror, investors are hoping that 2020 will usher in a new wave of growth for the cannabis industry.

And there’s plenty of reason to be optimistic. The pot industry is still in its infancy and is expected to experience massive growth over the coming years. It will likely explode once recreational marijuana becomes legal in the U.S. at the federal level.

The marijuana industry is just getting warmed up. Legalization is expanding around the world, sales are on the rise, and many publicly traded pot companies have been reporting strong revenue growth.

Should You Invest in Marijuana Stocks?

If you’re fine with investing in “sin stocks,” there are more than enough compelling reasons to delve into the marijuana sector. Risk-tolerant investors who aren’t afraid to roll up their sleeves and do some due diligence could realize strong short- and long-term gains.

The biggest appeal is getting involved in a massive industry that is on the ground floor and which has almost unlimited potential.

While recreational weed remains illegal at the federal level in the United States, the U.S. marijuana market is projected to hit $23.4 billion by 2022. (Source: “Legal Marijuana Markets Projected to Reach $23.4 Billion, Employ Nearly a Half-Million Americans by 2022; Effective End of Federal Prohibition is in Sight,” GlobeNewswire, June 28, 2018.)

A different study projects that global sales from the legal marijuana market will reach $66.3 billion by the end of 2025. In addition to the recreational weed market, that growth will be fueled by the expanding adoption of marijuana in medical treatments, including for cancer, chronic pain, and various neurological conditions. (Source: “Legal Marijuana Market Worth $66.3 Billion by 2025 | CAGR: 23.9%,” Grand View Research, last accessed January 14, 2020.)

Suffice it to say, some marijuana stocks will do exceptionally well over the coming years. Investors who zero in on those particular stocks could be rewarded.

U.S. Marijuana Legalization

The projections for legal marijuana sales in the U.S. are incredible, but they don’t really factor in the potential revenue that would come if the drug became legal federally.

Many analysts believe that the U.S., the world’s biggest economy, could legalize recreational marijuana within five years. It all depends who is in the White House.

At the state level, the U.S. is already well on its way; 11 states and D.C. have legalized recreational pot and 33 states have legalized medical marijuana.

With marijuana legal in some U.S. states but not federally, it makes for some confusing times.

For example, since cannabis is federally illegal in the U.S., companies can’t import marijuana products to states where it is legal, nor transport their own pot products across state lines.

Furthermore, even though pot is legal in certain U.S. states, Canadians crossing the border into those states can be barred from the U.S. for life if they either admit to having smoked marijuana, they bring cannabidiol (CBD) with them, or they admit to owning marijuana stocks that trade on the Nasdaq. That’s because borders are federally operated.

Things could change though.

In April 2019, U.S. Attorney General William Barr testified during a Senate Appropriations subcommittee and said he’s in favor of a more lenient, federalist approach to cannabis laws. Barr said he would prefer that cannabis be legalized at the federal level rather than just let individual states do their own thing. (Source: “Attorney General Barr Favors A More Lenient Approach To Cannabis Prohibition,” Forbes, April 15, 2019.)

Whereas Barr doesn’t like to see conflicts between state and federal laws, President Donald Trump seems okay with it. While Trump has suggested that he backs states’ rights to decide their own marijuana fate, he has never said that recreational marijuana should become federally legal.

Many believe that if a Democrat wins the 2020 presidential race, it will mean pot will be legalized at the federal level. But the Democratic candidates’ views on legalization are about as wide and varied as their Republican counterparts. (Source: “Legalizing Marijuana,” Politico, December 18, 2019.)

With two-thirds of American voters now backing the legalization of cannabis, and politics being what it is, it wouldn’t be a surprise to see the Democratic presidential candidate come down on the side of legalization the closer we get to election day.

U.S. States Legalizing Marijuana

A growing number of U.S. states have legalized medical or recreational marijuana (or both).

• Alaska legalized medical marijuana in 1998 and legalized recreational marijuana in early 2015.
• California was the first state to legalize medical cannabis in 1996, and it legalized recreational pot in 2016.
• Colorado legalized medical marijuana in 2001 and became one of the first two states to legalize recreational cannabis in 2012.
• C.legalized medical marijuana in 1998 (although implementation was delayed a few years) and legalized recreational weed in 2015.
• Illinois legalized medical pot in 2013 and became the 11th state to legalize recreational marijuana on January 1, 2020.
• Mainelegalized medical marijuana in 1999 and recreational pot in 2016.
• Massachusetts legalised medical cannabis in 2013 and recreational marijuana in 2016.
• Michigan legalised medical marijuana in 2008 and became the first state in the Midwest to legalize recreational cannabis in 2018.
• Missourilegalized medical marijuana in 2018.
• Nevada legalised medical marijuana in 2001 and recreational pot in 2017.
• Oregon legalized medical pot in 1998 and legalized recreational weed in 2015.
• Utahlegalized medical marijuana in 2018.
• Vermontlegalized medical marijuana in 2004 and recreational marijuana in 2018.
• Washington legalized medical cannabis in 1998 and became one of the first two states to legalize recreational pot in 2012.

(Source: “States Where Marijuana is Legal,” Business Insider, January 1, 2020.)

Several other states are also considering legalizing marijuana.

Future of the Marijuana Market

Marijuana sales in Canada are projected to double in 2020, hitting $3.2 billion in revenue in 2020, up from the 2019 forecast of $1.5 billion. (Source: “Pot sales in Canada to hit $3.16B in 2020 despite slower growth: Canaccord,” Bloomberg, October 31, 2019.)

In the U.S., total sales of cannabis in states where it is currently legal are projected to grow at a compound annual growth rate (CAGR) of 14% over the next six years, hitting $30.0 billion by 2025. (Source: “New Cannabis Report Predicts Legal Sales To Reach Nearly $30 Billion By 2025,” Forbes, September 24, 2019.)

Those projections could soar with additional states legalizing pot (or the drug becoming legal at the federal level).

Germany is the largest economy in Europe, with a population twice that of Canada. If it legalizes recreational marijuana, it will become the largest pot market in the world.

Other countries could also follow suit.

Furthermore, the market for cannabis-infused beverages is projected to soar. These products were legally able to hit Canadian shelves in December 2019.

Alcohol company Constellation Brands, Inc. (NYSE:STZ) has invested billions of dollars in Canopy Growth Corp (NYSE:CGC). Canadian brewery Moosehead Breweries Ltd. formed a joint venture with Sproutly Canada Inc (OTCMKTS:SRUTF, CNSX:SPR) to develop, produce, and market non-alcoholic marijuana-infused beverages in Canada.

Coca-Cola Co (NYSE:KO) was allegedly eyeing a similar deal at one point, and the company has not ruled out the possibility. (Source: “Coca-Cola’s top marketer: we’ll ‘never say never’ to marijuana-infused drinks,” The Drum, September 24, 2019.)

These kinds of deals give the marijuana sector more validity and long-term potential.

In addition to beverages, next-generation cannabis-infused products include topicals, vape pens, cosmetics, and edibles. It’s forecast to be a multi-billion-dollar industry.

Analyst Take

The outlook for marijuana stocks long-term remains bullish at every level. The sector is still new and has plenty of room to grow.

There isn’t a single (legitimate) study or report showing that marijuana sales are going to slide. In fact, they show the opposite. Marijuana companies are preparing for the global adoption of something that is a given. This has led them to expand their operations, grow new strains, expand internationally, sign deals, etc.

This doesn’t mean investors don’t need to be cautious. They still need to do their research and separate the best weed stocks from the chaff.