Investing In Cannabis Stocks

Liz Filmer
21 Mar 2023

The worth of the global legal cannabis market is expected to increase by 26.3% or $91.5 billion by 2028. With this outstanding anticipated growth, it's no surprise that many investors are curious about owning cannabis stocks. So what's the best method for picking what cannabis stocks to invest in? Here are some tips for prospective cannabis investors.

Know the different types of companies.

Growers and retailers: These companies grow, harvest, and distribute the end products. Some also own retail dispensaries that sell both medical and recreational cannabis.

Cannabis-focused biotechnology companies: Biotech companies extract cannabinoids from cannabis to create new pharmaceutical drugs.

Ancillary product and service providers: These companies support the cannabis industry by delivering services and products such as lighting systems, packing materials, and administration services.

Understand the risks 

Investing in any asset comes with some degree of risk. However, investing in cannabis stocks is associated with additional specific risks.

Legal and political risks: Cannabis remains illegal at the federal level in the U.S. U.S. federal law severely restricts banks that deal with cannabis-related firms. As a result, it's challenging for U.S. cannabis corporations to access essential financial services. 

Supply and demand imbalances: As a relatively young industry, cannabis is highly prone to fluctuating supply and demand, inducing prices and revenue to fall.

Over-the-counter (OTC) stock risks: the major cannabis companies trade on OTC markets, meaning they are not mandated to file financial statements regularly. Financial statements are crucial for investors hoping to evaluate the risk of a particular stock. OTC trading companies also do not have to hold minimum market capitalisations, resulting in low liquidity levels that make the cannabis stock challenging to trade.

Financial restrictions: Many cannabis industry players are unprofitable growing outfits with the possibility of running out of cash. They often boost capital by allocating new shares, diluting the value of existing shares. Even with this dilution, financially restrained cannabis enterprises can stumble in obtaining sufficient capital to operate successfully.

Know what to look for

When considering any stock, you should be able to understand the company's growth strategy and competitive position and be able to scrutinise the company's financial statements.

In the case of growing companies, typical metrics to study include the company's entire per-gram cost of producing cannabis. The 

cash cost per gram is a business's total per-gram cost of cultivating cannabis, excluding the expenditures associated with packaging and stock adjustments. It's a good idea to look for and prioritise growers with lower-cost systems as they tend to be the most competitive.

Invest in safer companies.

Investing in cannabis is risky, so it is best to start cautiously.

Some are arguably securer when choosing which stocks to buy; for example, some cannabis companies are part of larger agricultural companies that sell more generic garden products. As a result, they generate the majority of their revenue outside of the cannabis industry. Therefore, these companies will not face as many risks commonly linked with cannabis products making a better choice for the more conservative investor.

Monitor industry changes.

Its typically advised to take a long-term view when buying stocks; however, the dynamics of cannabis are subject to rapid change. As a result, the criteria you should use today to make a stock-buying decision could dramatically differ in only a few months.

Investors should closely monitor the industry. Some changes, like a federal relaxation of cannabis laws, would be beneficial, while others may be devastating. 

Incredible growth is feasible for the international cannabis industry but may not happen evenly or predictably. However, following these steps for investing in cannabis stocks may help guide you through investing in this exhilarating yet demanding industry.

Liz Filmer