Marijuana is going through a legalization phase.
Decriminalization of cannabis started in the 70s, culminating in Colorado and Washington becoming the first two states to legalize the substance for recreational use. In 2014, Alaska and Oregon followed and by 2018 there were 9 states in total that regulated marijuana similarly to alcohol.
At the same time businesses are stepping up to fill the demand that is cropping up. The Canadian company Cronos Group became the first marijuana company to list on a major US stock exchange when they started trading on the Nasdaq in February 2018.
Cannabis is going to become big business as the wave of legalization rolls through, estimated to grow to between $50 and $70 billion by 2021. The landscape looks promising with many companies fighting it out to become the next Wal-Mart of Weed.
Some of the biggest players include Scott’s Miracle Gro ($4.8 billion market cap); Canopy Growth Corp ($5.4 billion); Aurora Cannabis ($4.3 billion) and GW Pharmaceuticals ($3.8 billion).
Of the four biggest players however, only one is really making any money. Scott’s Miracle Gro lost $21 million in the last three months of 2017 and GW topped that figure by losing a whopping $46 million in the same time frame.
This is the crux of the problem. Everyone feels like marijuana stocks are about to take off, but that expectation alone has inflated the prices of stocks to the point that they may not be a good play anymore. Few of the companies are making money and people are trading more on hype than on solid financials.
Even Aurora Cannabis which reported net income of $7.2 million on $11.7 million in revenues isn’t as amazing as it seems. Taken at face value, their profit margin of 65% sounds incredible but dig a little deeper and you will notice that their financial statement shows that they counting in their profits $22 million in the form of an unrealized gain (they haven’t sold yet) from derivatives. So it would seem that they are not really making money producing or distributing marijuana.
So do be careful if you’re thinking of investing in a specific marijuana stock.
If it means anything consider the advice of Micah Tapman, a managing director at venture firm Canopy Boulder who is involved in a cannabis startup accelerator when he says that the smart money is in the high-end medical side of the space.
If you’re not sure, you don’t know what to do but you want to get involved, then it might make sense to invest in a marijuana ETF, something like the Horizons Marijuana Life Sciences Index. This ETF attempts to replicate the performance of the North American marijuana market, and helps an enterprising investor diversify while still gaining exposure to cannabis. Their expense ratio is 0.75%, which is on the higher side but you could invest while waiting for competitors to pop up.
Expect to see a wave of new ETFs, and other players pop up in the next years as marijuana becomes increasingly more accepted across the country. A small investment now could pay off big in the future.