Investing in Cannabis Stocks and Companies

We’re a boutique media firm that researches and writes about disruptive technologies for a global audience of investors. So why are we here talking about investing in cannabis? It’s a good question, so let’s delve into that a bit.

Why Nanalyze Covers Cannabis

Back in early 2016, we published our first piece on cannabis investing in response to what we observed was a rush to invest in something by newbie investors who knew little about what they were getting into. Our very first article ever on cannabis was titled “No to Marijuana Stocks, Yes to Weed Investing.” The initial thesis was that the real investing opportunities belonged to institutional investors, and that many of the “marijuana stocks” being touted were penny stocks that were nothing but scams and poorly-run outfits. That article solicited a great deal of attention from investors who said there were plenty of cannabis stocks to invest in.

Our second piece on the topic was titled “WARNING – Don’t Buy Cannabis Stocks!” Again, we saw a tremendous amount of backlash from first-time investors who claimed the opportunity was ripe and we were just a bunch of old conservative fuddy duddies that couldn’t tell Mexican brick weed from bubonic chronic. That’s far from the truth. Like Elon Musk, we puff the magic dragon on a daily basis every now and then and we aren’t afraid to admit it. What we are afraid of is the extremely large number of cannabis stocks out there that will eventually crash and burn. What we saw was an opportunity to educate the masses. Using our media brand, we could meet with these cannabis companies, deciphering the good from the bad, testing the product as we went along. The following year, we published a piece on How to Buy Marijuana Stocks for Dummies which was shared more than 15,000 times. Our subsequent piece on The Only Marijuana Stock to Buy That Isn’t Going to Pot gathered over 7,000 social shares. From then onward, we added cannabis to our list of twelve categories we cover and never looked back.

Today, we’re going tell you everything you need to know about investing in cannabis companies and stocks. From the Uber of weed to the McDonalds of dispensaries, we’re covering the biggest and baddest marijuana startups and publicly traded cannabis companies catching the chronic choo-choo train to money town. Since some of you may not puff the magic dragon, let’s start with some terminology.

Marijuana vs CBD vs Hemp

Industrial Hemp

Industrial hemp is a variety of the cannabis sativa plant that is grown all over the world and used for commercial products like hemp oil, fibers, and even hemp food products. Hemp does not contain the active ingredient that gets you high – THC – so it’s legal to grow hemp in the United States. There is a market for hemp, but for now it takes a second seat to marijuana that gets you high.

Cannabis

Marijuana, weed, cannabis, call it what you will, this is the plant you grew in your closet during college to help pay for tuition. Both medical and recreational cannabis contains tetrahydrocannabinol which is what gets you high. Growing good cannabis to smoke can be tricky, and growing great skunk buds, even trickier. (Companies like Grobo are helping to automate your closet grow operation.) The flowers of the plant smell delicious and are dried and smoked or turned into other products like distillates, waxes, or even cannabis drinks. Other active ingredients found in cannabis plants are cannabinoids.

Cannabidiol or CBD

Cannabidiol is one of 113 known cannabinoids found in cananbis plants. It’s recently become trendy as people use it for various applications like pain relief or as a sleep aid. It does not get you high, and most people can’t even tell if it is having any effects. In other words, its’ pretty easy to sell fake CBD when people can’t even tell what the real stuff does.

Each of these three categories of cannabis – hemp, cannabis, and CBD – are subjected to various laws in various jurisdictions. This is where things start to get a bit complicated. Let’s start by looking at marijuana legalization across the globe.

Global Cannabis Legalization

In many countries around the world, there is a distinction between recreational cannabis and medical cannabis. Let’s start by looking at the first country that legalized cannabis across the board.

What was the First Country to Legalize Marijuana?

Most Americans might guess that Amsterdam was the first country to legalize marijuana. Unfortunately, Amsterdam isn’t a country, it’s a city in The Netherlands where cannabis is not legal but smoking and selling cannabis is tolerated. Turns out the first country in the world where marijuana became completely legal – from production to distribution – is the country of Uruguay. With one of the highest literacy rates in the world at 98.5%, the country of Uruguay was the first to legalize cannabis completely. The next country to go down that path was Canada.

Canadian Chronic

The Canadian weed industry was one of the first of its kind with huge Canadian growers measuring their output by the ton. Similar to the United States, cannabis was not legal in Canada until only a few years ago. Up until that point, cannabis was still being grown and sold in numerous provinces like British Columbia. The first investment opportunity for cannabis was the large Canadian marijuana growers. (We’ll be talking about some of them shortly.) As for Cananda’s neighbor to the south, black market cannabis came across a huge competitive threat – legal recreational cannabis.

Marijuana in ‘Murica

We’ve smoked weed at members-only cannabis clubs in the European Union and bought more Mexican brick weed than you can shake a Thai stick at, but for our money, it doesn’t get any better than smoking some black market Alaskan Thunderfuck in remote areas of Alaska. Some of the best marijuana on this planet hasn’t made it’s way to any commercial dispensaries yet. If you’re an OG, you’ll know that the best marijuana was grown in Californian grow rooms, in Colorado closets, in grow operations throughout the Pacific Northwest.

There may be some big commercial marijuana growers in the United States, but the truth is, they still haven’t been able to bring out the strains we all grew up on. In America, weed was big before it became legal. In fact, the State of California is isn’t getting the demand they though because a good chunk of the market is still being serviced by black market growers. Not many Wall Street Analysts will understand why some people might continue to buy weed on the black market. It’s just one of the many idiosyncrasies you’ll observe in the fragmented American cannabis market where each state is its own oyster.

How Many States is Cannabis Legal In?

We need to distinguish between medical marijuana and recreational marijuana (more on that in s sec). As of right now, 33 states + DC have legalized cannabis in medical or recreational form.

Credit: KEY Investment Partners

Some of you might understand the dynamics of medical marijuana, so we’ll explain.

Even since California first legalized medical marijuana back in 1996, people have been using that channel for recreational use. If you knew someone from Cali back then, you know what we’re talking about. Everyone had a “friend” with a medical marijuana card. Maybe we hung out with the wrong crowd, but every Californian we knew had a medical marijuana card. That’s just how it was. As you can imagine, that paved the way well for recreational marijuana. The same can be said for all states that transition from medical to recreational. Some states even end up with confusing situations where medical dispensaries coexisted alongside recreational dispensaries. Everyone could get cured, not just the sick.

Let’s move on to talk about what you all came here for. We’re going to show you how to invest in cannabis across North America, starting with our friends in the north.

Canadian Cannabis Stocks

Canada presents a very different investment profile for cannabis investors because it’s legal across all provinces. One way to separate the wheat from the chaff for the picks and shovels of cannabis is to look at raw production numbers. How much weed did you grow, how much did it cost you to grow it, and how much did you sell it for?

Because cannabis is regulated so differently by geography, companies cannot do business the same way in each region. Consequently, we want to look at top-line numbers at the aggregate. Everyone is trying to capture market share so we’re going to turn a blind eye to massive cash burn. What we won’t excuse is a lack of strong revenue growth. The cannabis market is growing and evolving extremely quickly, and your company should be experiencing strong growth now. Promises of future growth are worthless in an environment that changes so quickly. We’re interested in looking for the biggest cannabis growers out there selling not just the cheapest weed out there, but the weed with the highest margins.

The biggest marijuana grower out there is probably still Canopy Growth Corporation. Let’s look at some of the Canadian growers that are publicly traded stocks which we profiled:

If you’re having a tough time choosing a winner, you probably want to read our piece on How to Tell if a Cannabis Stock is Good or Bad. But you may want to wait until you hear about all the cannabis stocks that will give you exposure to United States consumers.

Cannabis Stocks in the United States

Ever since the first cannabis IPO in the United States, everyone has turned a blind eye to cannabis stocks that trade on U.S. exchanges. When the first cannabis stock began trading on Nasdaq, and even High Times filed for an IPO, readers kept asking us about the legalities of holding such stocks. We advised that the last people you should seek legal advice from are a bunch of half-baked MBAs. The truth is, there are lots of grey areas in the cannabis industry because everything is so new. Doing business can be very tricky.

With marijuana being illegal at the federal level, any company that wants to sell cannabis across multiple states needs to treat each state as an entirely independent operation. Absolutely no business can be conducted across state lines. Consequently, we have the emergence of large multi-state operators (MSOs) that are trying their hardest to grow national cannabis brands which can be leveraged if and when cannabis becomes legal at the federal level.

Credit: Curaleaf

Many of the major MSOs that are publicly traded stocks. Because cannabis remains illegal in the United States, these companies trade on the Canadian Securities exchange which is also referred to as the Cannabis Securities Exchange. Throughout this article, we’ll be linking to articles we’ve written about these companies. Keep on reading.

What is The Biggest Cannabis Company in the United States? Probably Curaleaf (CUR:CN)

When we talk about “the biggest company” in any particular space, we usually use market cap as a measurement (it’s just shares outstanding X share price). By that definition, the biggest cannabis company in the United States is Curaleaf, a vertically-integrated cannabis company with major operations in Florida and New Jersey.

Investing in Cannabis ETFs

The first cannabis ETF to debut was the Horizons Marijuana Life Sciences Index ETF which trades under the ticker HMMJ. When the index had a rebalance and added 10 new constituents, we questioned whether or not some of these 10 cannabis stocks were of sufficient quality to be added. Fortunately for investors, there are also a number of other cannabis ETFs to consider.

  • ETFMG Alternative Harvest ETF
  • AdvisorShares Pure Cannabis ETF
  • MicroSectors Cannabis Index ETN
  • The Cannabis ETF
  • Global X Cannabis ETF
  • Cambria Cannabis ETF
  • AdvisorShares Vice ETF
  • MicroSectors Cannabis 2x Leveraged ETN

None of these ETFs have meanginful assets under management except the largest by far, the ETFMG Alternative Harvest ETF (MJ). Issued by ETF Managers Group, it now has nearly twice the assets of HMMJ with $686 million invested in a portfolio of cannabis stocks. MJ also represents a more balanced way to play the cannabis theme with a more equal distribution of stocks between Canada and the United States.

Investing in CBD Stocks

The CBD thesis has a few obvious problems, the worst one being that the FDA isn’t particularly sure how to regulate CBD and issued some pretty dire warnings regarding its use. One family-owned CBD company worth taking a look at is Charlotte’s Web, a company that we decided to invest in because we liked the story. We also tried to figure out a fair price for Charlotte’s Web stock, something that didn’t quite pan out. It’s something we covered in a piece titled Why is Charlotte’s Web Stock Dropping? Long story short, there is a great deal of uncertainty around how CBD affects people and consequently the government needs time to decide how to regulate it. All that uncertainty means lots of volatility and risk. Another pure-play CBD stock is Elixinol, something we covered in our piece on Elixinol Stock vs. Charlotte’s Web Stock. Both of these companies grow cannabis plants to extract the CBD, and need to consider the many startups trying to make marijuana cannabinoids cheaper using techniques like synthetic biology.

Investing in Cannabis Startups

An increasing number of fintech startups allow retail investors to access shares of pre-IPO companies. Consequently, retail and institutional investors alike would be interested to hear that there are many cannabis startups taking in sizable funding rounds. And many startups developing seed-to-sale solutions making it easy to navigate the quagmire of regulations each state has imposed. A whole slew of online marijuana marketplaces have cropped up, with apps that let you browse nearby dispensary offerings, order, and have some ganja in your lungs within a couple of hours.

There’s lots of tech stuff happening as well. Startups are looking at how we can leverage the fields of biotech and synthetic biology to produce cannabis compounds cheaper and faster. Looking at the genetic makeup of various cannabis strains lets us start having some consistency in naming them. Even the high-tech Israelis are getting into cannabis.

Cannabis Investing is Extremely Risky

If you’re the sort of person who thought ICOs were a good idea, you probably shouldn’t be investing in the cannabis sector. Companies like Medmen will promise you the Apple store of cannabis dispensaries and spend all your money on over-priced Hollywood mansions. We’ve seen so many poorly run cannabis companies that we decided to dedicate a section to talk about the risks inherent to cannabis investing. If you’re a newbie investor, the best cannabis stock to invest in is probably none.

When Cannabis Stocks Soared

Unfortunately, many investors didn’t heed our warnings and bought into cannabis stocks as they soared up to ludicrous heights on rumors of larger corporates like Coca-cola showing an interest in cannabis drinks. That party didn’t last too long. You can’t command a massive market cap among sin stocks and then not deliver on the revenues.

The stakeholders over at Hexo weren’t too happy that Hexo Corp stock hadn’t achieved the sky-high valuations that their competitors had – Credit: Nanalyze

Back in the fall of 2018, people kept asking, “is it too late to buy marijuana stocks?” In response we wrote a piece titled A Marijuana Venture Capital Firm Has an IPO and pointed out the complete lunacy on display as shares of Tilray breached $250 per share. “It’s almost impossible to fathom such irrational exuberance,” said one of our underpaid MBAs.

When the company CEO sat down on CNBC’s Mad Money to talk about his company reaching a $100 billion market cap, some people took that as investment advice. At that time, Tilray was more valuable than any of the below companies:

  • Best Buy – Sold $39 billion of technology products, services, and solutions in 2017
  • Hershey Company – Sold $7.5 billion of confectionery products in 2017
  • Tyson Foods – Sold $38 billion of chicken, beef, pork, and prepared foods in 2017
  • Stanley Black & Decker – Sold $12.7 billion worth of tools and storage, accessories, and security solutions in 2017
  • Nasdaq Inc. – A financial exchange that cleared nearly $4 billion in 2017, and ironically, the same exchange Tilray trades on

Compare those numbers with the $20.5 million in revenues that Tilray managed in 2017 and you can get some idea of how much this stock was being driven by hype. Today, Tilray trades at around $10 a share.

The biggest reason to avoid the cannabis theme is because of something called “regulatory risk.” Right now, cannabis is illegal at a federal level in America, so each state has its own set of rules to play by. It’s something that creates a large risk premium for the cannabis sector, something we touched on in a piece titled Trulieve Stock and the Cannabis Risk Problem. There was also a tendency for firms to overextend themselves financially as they scrambled to acquire market share, something we talked about in our piece on The High Price of Cannabis Stock Acquisitions. If the companies aren’t behaving rationally, don’t expect their investors to.

Investing in the Ancillary Cannabis Sector

There are plenty of venture capital firms focused on investing in cannabis. There are even cannabis accelerators that will help get your weed venture off the ground. Still, because cannabis is still illegal at the federal level, investors are wary of the United States where most of the opportunity for cannabis legalization lies. One way to reduce regulatory risk when investing in cannabis is by looking at any opportunity that doesn’t come into contact with plants. We refer to this as the ancillary cannabis sector. For example, Scotts Miracle-Gro has seemingly benefited from the growth of indoor growing equipment and fertilizers needed by all the cannabis growers out there. Denver startup Baker which is building a CRM system to be used by dispensaries – the Salesforce of weed. Hound Labs is working on developing a breathalyzer for cannabis that can tell if you’ve smoked too much weed before driving. There are also many startups focused on marijuana growing technologies which will never actually come into contact with plants.

Cannabis Penny Stocks

We’ll say it until we’re blue in the face. Do not invest in penny stocks, or what they also call over-the-counter stocks. You will encounter nothing but broken promises and shattered dreams. This is especially true in the cannabis space. The SEC issued a warning specifically about the dangers of investing in marijuana penny stocks. We previously published a list of 57 marijuana stocks, of which the majority were penny stocks. Because so many newbie investors are attracted to the cannabis space, everyone and their brother decided to launch a publicly traded cannabis company. We started to highlight cannabis penny stocks you shouldn’t buy and gave up because the task was just too large.

Once in every blue moon you might find a penny pot stock worth a second look but it’s like walking through a mine field looking for mushrooms. More likely than not, you’ll come across piles of garbage like Cannabis Science (CBIS), which was such a mess that we filed a complaint with the SEC. They haven’t done anything about the problem yet, which goes to show that investors are often on their own if they get fleeced.

When Cannabis Stocks Come Crashing Down

There are a few problems with investing in cannabis as a theme. Firstly, you have many first time investors coming on board who are entirely new to investing and behave extremely irrationally. This leads to extreme valuations that make no sense at all. When the market starts to see a correction, cannabis stocks come crashing down to earth. This causes the herd to panic, and prices crash even further. Sure, you could invest in a cannabis ETF to offset some of that risk, but it’s not that simple.

We’ve written before about the marijuana stock paradox which suggests that no matter how well the cannabis industry fares, there will be enough losers to offset the gains made by the winners. We’ve largely steered clear of investing in cannabis because we don’t find an acceptable ratio of risk to reward. Still, we’ll continue to explore global cannabis investing opportunities for our readers and occasionally touch on other illegal drugs we enjoy in moderation, like psychedelics.

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