Originally published on October 30, 2019, this post was substantively updated on January 7, 2020.
Cannabis is a hot sector. Despite the struggles the industry faced in 2019, hopes are the industry could bounce back in 2020. Expectations for Cannabis 2.0 products are high. Cannabis 2.0 products include a wide variety of edibles, concentrates, and beverages. The popularity of these products is quite high both in Canada and the US.
Hence, right now, how to buy cannabis stocks is a question that’s likely on many investors’ minds. Marijuana is still federally illegal in the US, and many top cannabis players are based in Canada, so you may be wondering: what’s the best way to invest in marijuana stocks?
Various kinds of cannabis stocks
The marijuana industry is an evolving one. Medical marijuana has shown increasing importance in a variety of countries. As of 2018, Canada is on track to reap the benefits of full-scale legalization of both medical and recreational marijuana. Last year in October, Canada legalized more forms of recreational marijuana. In the US, 33 states and Washington, D.C., have legalized medical marijuana. A total of 11 states and Washington, D.C., have legalized adult-use marijuana.
Before we get into the nitty-gritty of investment in cannabis stocks, let’s talk about the different kinds of marijuana companies that exist:
- Marijuana producers and growers: companies that grow cannabis and cannabis products.
- Marijuana-focused drugmakers: cannabis biotech companies and pharmaceuticals.
- Service providers for marijuana companies: support for marijuana growers and cannabis retail companies.
- Cannabis ETFs.
Most big cannabis players are based in Canada and trade on the TSE (Toronto Stock Exchange). These players include Aurora Cannabis (ACB), Canopy Growth (WEED), Cronos Group (CRON), HEXO (HEXO), and Aphria (APHA). However, Aurora, HEXO, Aphria, and Canopy also trade on the NYSE.
The cannabis industry is an interesting one
Canada is on track to become the country that profits most from cannabis legalization. The US also has wide support from its citizens to legalize cannabis. However, the Trump administration’s cold stance toward legalization raises doubts about whether federal legalization is possible. Many investors are likely wondering how to buy stock in the marijuana industry given the legal confusion.
If you’re wondering what the best stocks to buy now are, it may be hard to put your finger on any one in particular. However, it’s safe to say the more prominent players have strong fundamentals. Despite weaker results this year, these companies can still expand and drive growth and profitability. For example, Constellation Brands (STZ) has Canopy Growth’s back as its largest shareholder. With its help, Canopy is launching a new set of products for edibles expansion. To learn more, read A Look at Canopy Growth’s Acquisition Portfolio.
Canopy Growth’s debt level is also low compared to that of its peer Aurora Cannabis, whose rising debt is a concern. The mergers between cannabis companies and food and beverage companies show room for further growth, making them interesting prospects. New Frontier Data suggests that the Canadian cannabis business has a bright future.
Aurora Cannabis isn’t far behind. It’s invested in the construction of high-quality production facilities and strategic investments to establish itself in the future edibles market. Despite its being a smaller company, Aphria is also in a strong position under Irwin Simon’s leadership.
How to buy legal weed stocks
Research is essential before investing in any stocks—especially marijuana stocks, given the volatility and legal complications in the sector. As per Greedy Rates, you can choose to invest via a financial advisor or via an online broker such as Questrade. With a financial advisor, the advantage is that you’ll be able to take suggestions or clear up concerns before choosing and investing in any marijuana stocks. However, with an online brokerage, receiving personal advice is more difficult and could create some confusion in choosing the right stock. One advantage of online brokerages is the minimal fees.
You can also choose to invest in weed stocks directly. As we said earlier, Canopy Growth is listed on the NYSE (CGC) as well as the TSE. Aurora Cannabis is listed on both the NYSE and the TSE.
You can also choose to invest in companies that have partnered with cannabis companies. For example, Constellation Brands is partnered with Canopy, and Molson Coors is partnered with HEXO. Many other cannabis stocks also trade on over-the-counter US exchanges. You can also choose to invest in cannabis suppliers.
ETFs and brokerages
If you’re interested in ETFs, you may want to check out the Horizons Marijuana Life Sciences Index ETF (HMMJ), which tracks the North American marijuana industry. To learn more about cannabis ETFs, read An Investor’s Guide to Cannabis ETFs.
Before you choose to invest, you’ll need to open a brokerage account to purchase publicly traded marijuana stocks. According to a SmartAsset article, investors can consider brokerage companies such as Robinhood, Merrill Edge, and TD Ameritrade to invest in marijuana stocks. Once investors have a brokerage account, they can choose whether to purchase through a market order or a limit order. The article further discusses that in a market order, one can purchase a stock at its current market price. However, in a limit order, investors have a choice to clearly specify the maximum or minimum price at which they would like to buy or sell.
What are the risks and benefits?
Marijuana is legal in a handful of US states. However, since it’s federally illegal, it wouldn’t be a surprise if federal intervention happened in states with cannabis companies. Moreover, recently President Donald Trump also mentioned that if required, he could allow federal interference in states in which cannabis is legalized. Thus, there’s risk even in states that have legalized weed, so there could be legal ramifications if you invest in marijuana stocks. The industry is also susceptible to regulation scandals and corruption scams. CannTrust’s (CTST) violation of Canada’s cannabis regulations in 2019 dragged on its stock and the entire sector.
Recently, news came out about Tilray and HEXO also being involved in investigations. To learn more, read Cannabis Scandal Radar: Is Tilray Next? and HEXO: The Next Cannabis Player on the Scandal Radar?
Small mishaps can affect investors’ returns. HEXO’s recent news and fourth-quarter performance dragged its stock down last year. In 2019, Canopy fell 21.5%, Aurora fell 57%, and Aphria fell 17.5%. HEXO fell 69.7%, while Cronos fell 37.9% in the year.
Marijuana is an evolving yet volatile sector. The stock market and risk go hand in hand. If you’re an investor who’s okay taking on additional risk and waiting for an evolving industry to bear fruit, you may be comfortable choosing marijuana stocks. However, any investment requires thorough research of the pros and cons.
For more cannabis-related news and updates, be sure to check out 420 Investor Daily.