Should You be Investing in Cannabis Stock?
At the end of 2022, cannabis became legal to purchase and possess in Missouri (over the age of 21) with the first licensed sales occuring on February 3rd. News stations could be seen outside of local dispensaries, panning their cameras at the lines of consumers waiting for their goods. There were the typical types that you would expect in line. But there were also men in business casual clothes, soccer moms, and even boomers. And while this industry having regulated brick and mortar stores is a new idea, cannabis use is not.
For a significant portion of human history, marijuana has been used by us, estimating about 5,000 years back. Archeologists even found evidence of it’s use as far back as the first millennium BC. When it was originally brought to the Western World, cannabis was used for many medicinal and therapeutic treatments, including cases where cannabis stopped convulsions in children. However, this was also a time where medicines included things such as opium and cocaine. These drugs got all lumped together and banned for use in the US in 1938. By the 50’s, marijuana was being called not only a dangerous drug, but a stepping stone to heroin and other dangerous controlled substances. Labeled the “devil's weed”, it was taught as a fact that marijuana was a gateway drug. Federal laws and mandatory penalties for drug-related offenses were enacted. And then of course came the 60’s, with hippies and rebellion against authority. Marijuana became the symbol of the counterculture. If you were caught with weed in the 60’s you could be handed a minimum sentence of 2-10 years with up to a $20,000 (that’s about $202,000.00 in 2023 money) fine. Once The Controlled Substances Act of 1970 was put into place, marijuana, along with heroin and LSD, were classified as a Schedule 1 drug, meaning they carried a high abuse potential and were not accepted for medical use. President Reagan headed the “Just Say No” campaign in the 1980’s and early 90’s that included things in our elementary schools like D.A.R.E and Red Ribbon Week.
But despite the efforts, by 1993 marijuana use started to increase among 12-20 year olds. Popular 1995 movie “Friday '' depicts unemployed Craig and his best friend, small-time drug peddler Smokey. They find themselves owing Smokey’s drug supplier and end up in dangerous situations because of it. The film has a large cult following and turned out not only one, but three sequels. “Friday '' was part of a shift in our culture, where some of the country began accepting drug humor. Our 42nd president Bill Clinton, who couldn’t quite deny that he had tried marijuana, is responsible for the infamous excuse that he “never inhaled”. Anti-drug campaigns were still everywhere in the 90’s, however pop culture was going up against the stigma. Willie Nelson, the Black Crows and Snoop Dog were publicly advocating for cannabis and movies like the aforementioned “Friday '' and “Dazed and Confused” were solidifying stoner comedy. Once Y2K came and went, a huge explosion in cannabis culture followed, as well as new strains and expansions to the cannabis gene pool. Medical marijuana was born and sold in the 13 states who legalized it during the 2000s. Researchers began really studying the risks and benefits of cannabis, THC and the popular CBD. The 2010’s are called the “decade of marijuana legalization” with states reaping the benefits of the taxes being paid for legalized marijuana sales.
And now we are here, a couple of months into 2023, weed is legal both medically and recreationally in Missouri. It is legal medically in 33 U.S. states and recreationally in 11 states plus Washington D.C. There are stores around every corner that anyone over the age of 21 years old can walk into and purchase marijuana. The cannabis industry is a real industry now.
So…should we start investing in it?
Marijuana stocks offer an opportunity for huge gains, but also significant risks. The legal marijuana industry is rapidly expanding, with global sales expected to hit $146 billion by 2025. And along with increasing legalization, there are several trends driving the growth of the marijuana industry:
Medical applications.
- Marijuana is used to treat chronic illnesses like cancer, Alzheimer's, and epilepsy.
Mainstream acceptance.
-Marijuana is becoming more accepted, reducing the stigma and attracting new users.
Investment capital.
-The growth of the industry is attracting investors and boosting companies' access to funding.
Tourism.
-States like Colorado that have legalized recreational marijuana are seeing an increase in marijuana-themed tourism.
However, federal law still prohibits marijuana, and a policy change could significantly disrupt the industry. The risks can be high (no pun intended). Marijuana stocks are very volatile, sometimes fluctuating up or down more than 30-50% in ONE SINGLE DAY. This proves that large gains can be possible, but so can significant losses. If you look online, you will read several articles that say you shouldn’t invest in cannabis stock unless you can afford to lose it, which isn’t something all of us have room in our budget for.
Volatility & Risks
Regulatory changes. A federal crackdown on marijuana could cause stocks to crash.
Overvaluation. Marijuana stocks are often overhyped, and stock prices could decline sharply.
Dilution. Companies may issue more shares to raise capital, reducing your ownership and value.
Bankruptcy. If companies cannot achieve profitability, they may go bankrupt, wiping out shareholders.
Fraud. Some marijuana companies have committed fraud, misleading investors for personal gain.
Always do your own research to fully understand the risks of any marijuana stock before investing. Focus on reputable companies with viable business models to minimize risk. With hundreds of marijuana/cannabis companies to choose from, it is extremely important that you do your homework and evaluate each company carefully.
Here’s some things to look for:
1). An established company
New companies are riskier and more likely to fail. Look for a company that has been in business for at least 3-5 years.
2). A viable business model
The company should have a realistic plan to achieve profitability, not just over promise future potential.
3). Strong leadership
The company should have experienced executives and managers in both the marijuana industry and business in general.
4). Competitive advantages
Look for companies with unique products, intellectual property, branding, or other advantages over competitors.
5). Access to capital
The company should have a strong balance sheet and access to funding to execute on their business plan.
6). Focus on medical marijuana
Medical marijuana companies may be safer than recreational companies, depending on regulation.
7). Reasonable valuations
Only invest in companies with stock prices reasonably proportional to their revenue and earnings. overhyped stocks will likely decline.
8). Transparency
Look for companies that are transparent in their financial reporting and communications. Avoid companies that over promise or lack credibility.
If you decide you want to invest in cannabis stock, take a cautious approach. Like I mentioned earlier, only invest money that you can afford to lose. Marijuana stocks are very risky right now and you could lose your entire investment. And while listening to a friend or family members advice on this topic can be helpful, be sure you do your own research on which company you pick. Never invest in a company you do not fully understand, based solely on a tip. You can start small, investing only a small amount of money at first to gain familiarity with the industry ebbs and flows before investing larger amounts. You can also consider an ETF. A marijuana ETF can allow you to invest in the overall industry without picking individual companies and their stocks. And consider consulting a financial advisor who can help you evaluate your risks and determine how much to allocate to cannabis stocks based on your financial plan and situation.
The legal marijuana industry can be an exciting opportunity for investors, but it can also be a very treacherous one. By understanding all aspects of the industry, risks, and individual companies, you can make smarter investment decisions. While huge gains are possible, never invest more money than you can afford to lose when buying marijuana stocks. If you go in with realistic expectations, do your research, and take a cautious approach, marijuana stocks could be a lucrative addition to your investment portfolio.
-Sylvia McCormick Burns (co-founder Oakview Wealth Solutions)