So you want to invest in marijuana stocks? Fine.
When you’re looking for the best marijuana stocks to buy though, you’re not going to be able to go to your favorite stock screener, select “cannabis industry” and sit back to scour through a bevy of impressive options.
The truth is there just aren’t many good marijuana stocks out there, and for good reason: the substance is still considered federally illegal in the U.S., despite what local laws may be.
On top of that, the Trump administration, and particularly Attorney General Jeff Sessions, is not known for its drug leniency, and few banks are willing to take money from businesses seen to be violating federal law.
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As such, the landscape will be full of landmines for the next few years; it may be the 2020s before the cannabis industry can really go mainstream.
But for those itchy to have some skin in the game — even if it’s only with medical marijuana stocks — here’s a look at today’s industry anyhow, as well as tips on what you should look for when trying to find a good marijuana investment.
Where to purchase marijuana stocks. Right now — and likely for the near future — there’s one country with a firm grip on the best weed businesses in the world: Canada.
“The Canadian side has companies that are safer bets,” says Rob Hunt, principal of ConsultCanna, a boutique consulting firm that provides market intelligence.
“Canopy Growth, Aphria and OrganiGram Holdings — these companies are building really nice business models,” Hunt says.
There’s just one problem with these companies: “They’re terribly overvalued,” Hunt says. “I think eventually they’ll grow into their market cap, but right now they’re exceptionally expensive.”
He’s not kidding. Canopy Growth, Aphria and OrganiGram go for 37, 45 and 54 times sales, respectively. The most expensive stock in the Standard & Poor’s 500 index by that metric, Incyte Corp. (Nasdaq: INCY), goes for 19 times sales, or twice as cheaply as the cheapest weed stock.
Why exactly does Canada have some of the best marijuana stocks around? If you guessed the legality issues, you’d be right.
Canada doesn’t have to worry about those.
“The federal government announced that they plan to legalize recreationally by July 1, 2018,” says Danny Brody, vice president of investor relations at The Green Organic Dutchman, a Canadian private cannabis company aspiring to go public in January.
With medical cannabis already federally legal in Canada, recreational legalization will open up the floodgates of demand. It will also be historic.
“We’d be the first G-7 country to legalize recreationally,” Brody says. “This is one of the first times in history where Canada doesn’t have to compete with the States. We’ve got the opportunity of a lifetime here.”
In less than 10 months, the world will be able to watch and study to see how that history writes itself.
So, with value hard to find given the investor excitement — both in Canada and the U.S. — surrounding the upstart cannabis industry, what should potential investors research when looking to get involved in the area?
What cannabis investors should look for. Brody thinks that the best marijuana stocks to buy don’t just have a good business plan — frankly, solid business plans are a dime a dozen. What matters is executing on those plans, and that requires both a great management team and experienced partners that can bring value to the company.
“A lot of people come to this industry as doctors or farmers; quite a lot come from business backgrounds,” Brody says.
If you’ve gone gung-ho into marijuana stocks and own shares of a company that grows cannabis and puts ingredients into topical creams, for example, you may be in deep trouble if the entire business is run by MBAs. Doctors and farmers — either as partners or company managers — need to be hands-on stakeholders in a business like that.
The second thing every cannabis investor should know before buying marijuana stocks is the company’s long-term plan. Specifically, their long-term pricing plans.
“One of the most important things is — and I can’t stress this enough — is are they focused on becoming a low-cost producer?” Brody says.
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Marijuana is still in the nascent stages of its market adoption in Canada, and as it stands, demand far outstrips supply. Eventually the market will correct itself and marijuana’s primary use will be as an ingredient in other consumer packaged goods (CPGs).
“Marijuana’s no different from any other CPG industry. The two factors that lead any CPG industry are high-quality and low cost. So unless businesses are planning right now to be low-cost producers, to plan ahead for price compression, they’re going to get left behind,” Brody says.
Over time, factors like price compression, quality and branding will determine who gets left behind and who charges ahead to industry domination. And despite Canada’s fast-tracked 2018 acceptance of the cannabis industry (or perhaps because of it), investors are about to witness a multi-year Darwinian bloodbath as each company aggressively competes to gain lasting market share.
It will be quite ugly and returns will be hopelessly volatile. At some point, a few potential winners will likely emerge, but don’t be surprised if that isn’t until the early 2020s.
If the U.S. doesn’t have the wide range of weed stocks that Canada does, it still has ways for determined investors to help the young industry grow — and see their money grow with it.
U.S. investing: moving beyond small medical marijuana stocks. For those uncomfortable throwing their retirement dollars into some Canadian cannabis stocks, U.S. weed stocks aren’t exactly a paragon of safety either.
“There’s a lot of opportunities that on a flip are pretty exciting, but they’re not buy-and-hold strategy stocks,” Hunt says.
How long does the public have to wait for Wall Street to be teeming with legitimate marijuana stocks, the kind you’d be comfortable holding for five or 10 years?
“I think it’ll take a softening on a federal level to cannabis-based businesses. It’ll be at least a couple years,” Hunt says.
With a Republican-controlled White House until at least 2020 and perhaps longer, that timeline could be putting it charitably.
Other ways to invest in legalized marijuana. A dearth of quality medical marijuana stocks to buy doesn’t mean there’s no opportunities to legally invest in the U.S. cannabis industry. If you’re an investor with some money on the sideline looking to get involved, you can. You’ve just got to be willing to think outside the box.
“There’s tons of private companies trying to get off the ground, seeking, say, half a million dollars. They’ll split that up between 20 investors,” Hunt says.
He recommends potential investors with the money and the courage go to industry conferences, talk to entrepreneurs and figure out what differentiates them before committing to any funding.
When to invest in marijuana stocks. Years from now, big industry will plunge into the business. Hunt says he’s talked to representatives from many of the biggest tobacco companies in the world, and that they’re ready to pounce on the crop as soon as legal issues subside.
They could be waiting a while, sure, but “better safe than sorry” is a mantra that never killed anyone.
U.S. investors should learn a lot from Canada as its marijuana industry grows and matures, creating winners and losers along the way. U.S. investors can buy Canadian marijuana stocks, but at current valuations may be better served putting their money to work on the roulette wheel.
Patience is a virtue. Regardless of whether you buy Canadian marijuana stocks or U.S. marijuana stocks, the immaturity of both markets requires excessive speculation, even if you decide to invest immediately after recreational marijuana becomes federally legal in Canada next year.
Watch what happens in Canada, which companies begin doing well, and why. At that point, you can more confidently wager on Canada’s winners or look for their analogs in the U.S. and invest in them. There will be plenty of opportunities in the 2020s to make money in this space.
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Just keep in mind: good things take time.
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The Best Marijuana Stocks to Buy Won’t Exist Until 2020 originally appeared on usnews.com
