4 Things You Need To Know Before Investing in Cannabis Stocks

Get ready to research.

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Photo by Noah Buscher via Unsplash

One of the most-discussed investment sectors for 2017 is the cannabis industry. It is poised for growth, to be sure: After November’s historic election, eight state now have legalized full adult recreational use and 29 states have a medical marijuana program.


As the legal consumer base blossoms, so does the revenues. Cannabis sales will nearly triple in the next three years — from $7.4 billion today to nearly $21 billion by 2020, with a compound annual growth rate of 29 percent — Arcview Market Research, a San Francisco-based cannabis research firm, projects.

Colorado, Washington and Oregon — the most mature legal states — experienced 62 percent growth last year.


With that kind of explosiveness, investors’ eyes are bulging with visions of possibilities of enormous wealth. But before you begin investing in cannabis stocks, there see are a few things you should know.

What does the company even do?

Are you investing in a farm? A technology? A retailer? It matters. According to a detailed a analysis by Bloomberg Intelligence:

 The pot companies are an eclectic mix. Pharmaceutical businesses have been the most successful so far. Some produce medical marijuana; others are hedging by investing in hemp- or cannabis-based drugs to treat pain and fibrotic diseases. Marijuana growers make up the second largest segment. And two tech companies are developing breathalyzers for pot smokers.

Here is a breakdown of investment in the cannabis sector’s sub-categories:

  • Pharmaceutical & Research: $1.5 billion
  • Producer/Grower $645 million
  • Consumer products: $302 million
  • Real estate: $216 million
  • Consulting:  $170 million
  • Technology: $162 million
  • Industrials: $54 million

Some investors make the investment calculation in a simple way: Does the company “touch” the product or not? Since cannabis is still considered a Schedule I substance and federally illegal, risk-averse investors steer clear of grow operations or farms since the risk is considered high. Investing in real estate and consulting, for example, are considered a safer strategy.


What is a penny stock?

Over-the-counter (OTC) stocks — also known as penny stocks because of the low price of most shares — are among the riskiest investments you can make. When you make an OTC stock purchase, be prepared to lose it all.

Companies that trade shares over the counter do not have to file audited financial reports with regulators. Claims made by the companies can often be exaggerated and these stock prices are easy for insiders to manipulate.


The Securities and Exchange Commission issued an investor alert in 2014 regarding fraudulent marijuana stocks, warning potential buyers of exaggerated claims:

“Fraudsters often exploit the latest innovation, technology, product or growth industry — in this case, marijuana — to lure investors with the promise of high returns. … When publicly-available information is scarce, fraudsters can more easily spread false information about a company, making profits for themselves while creating losses for unsuspecting investors.”

Does this mean do NOT invest in these stocks? No. It just means that you need to be diligent in your research. And if you are getting the hard sell, it’s wise to walk away.


Are there marijuana stocks sold on regulated exchanges?

There are a handful of large firms that are worth considering if you are seeking a lower-risk strategy. Keep in mind that these stocks are not as volatile and the growth curve will be more gradual.

GW Pharmaceuticals 

This biotechnology firm based in Great Britain makes cannabis-based drugs. The company’s product line includes medicines that help treat pain, multiple sclerosis and severe epilepsy. (NASDAQ: GWPH)

Microsoft

Yes, the Washington-based software behemoth is in the marijuana business , tangentially. In 2106, Microsoft purchase Kind Financial in an attempt to boost its cloud-computing offering. Microsoft is working with Kind’s “government solutions” division, which provides compliance systems to state governments that have legal marijuana laws. (NASDAQ: MSFT)

The bottom line: Should I invest in cannabis?

It’s your money. Do your research. Double check your research. Take a look at your investment portfolio. Do you have relatively safe investments that would counterbalance taking a runner on a longshot?

And, finally, search SEC.gov to see whether the SEC has taken any action against the company or anyone associated with the company.

Highway is an essential source for cannabis science, how-to stories and demystifying marijuana. Want to read more? Try these posts: 71% Of NFL Players Want Marijuana Legal, Why Your Marijuana Smells Skunky and A Drag Queen’s Visit To The Cannabis Store


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