As more countries continue to decriminalize cannabis and its products, investment opportunities for both entrepreneurs and existing industries continue to grow tremendously. In fact, the cannabis industry is speculated to hit $30 billion by 2022 and double in value by 2025.
But since it's still a relatively new industry, there are plenty of investment risks. Earlier this year, investors had high hopes for the cannabis industry before the presidential election. This caused stock prices to peak in February. However, since then, investors have been disappointed with the rate at which the federal legalization of cannabis is progressing. And as a result, stock prices have plummeted significantly.
The current state of prohibition means higher taxes, as well as more compliance regulations and increased costs. An end to this prohibition would result in higher cash flows and presumably higher valuations. Large corporations have already started preparing for this by buying out smaller companies in a move to raise their valuation and stock prices. In the same measure, seasoned stock investors are piling up their stocks to boost their portfolios in 2022.
Regardless of your experience in stock investment, it pays to have a deeper understanding of how the industry works. For this reason, we've prepared a guide that will get you up to speed on the cannabis industry. We've also compiled a list of the top five cannabis stocks that are currently doing well and are expected to maintain that trend in the coming year.
Reasons Why You Should Invest in Cannabis Stocks
The stock market presents endless opportunities to grow your wealth. But no matter what your strategy is, it pays to put your cash behind companies that are sure to grow in revenue. And what industry is better than the cannabis industry?
Here are some of the reasons why buying the right cannabis stock can benefit you in the long haul.
Outstanding Revenue Numbers
In both Canada and the US, companies in the cannabis industry trade publicly on the stock market. Unfortunately, since cannabis is still illegal on the federal level, “pure-play” cannabis companies do not trade on the US stock market. But as legalization continues to spread, more companies are expected to join the public listings. This has boosted the sector's value in general.
Take Scotts Miracle-Gro, for example. The company has shown a significant revenue increase in the past three quarters. It recently reported a 28% revenue increase in the third fiscal quarter of 2020. The company particularly excelled in sales at its Hawthorne subsidiary, where sales went up by 72% to reach $300 million.
And this isn't the only cannabis-related company that is showing significant growth. Other industry players like POSaBIT Systems have also grown tremendously through the pandemic. As more states legalize cannabis, the companies that play their cards right are a solid bet for your cannabis stocks.
Thanks to all the hype around the cannabis market and the ever-increasing recognition of the legitimacy of the herb, the cannabis industry is expected to grow exponentially over the coming years. Both the recreational and medical markets are expected to grow thanks to legalization and the potential health and therapeutic benefits the herb offers.
According to a 2020 Grand View research report, the cannabis market is expected to reach a market value of $70.6 billion by 2028. Another analysis from Cowen shows that by 2026, the cannabis market could generate as much as $75 billion in annual sales. This is up from a previous forecast, which had predicted the market would only generate $50 billion.
If you're looking at the short term, the cannabis market is already making significant strides. This makes cannabis stocks a viable long-term investment.
The Demand Is Booming
The cannabis market has seen a steady rise in consumer demand. In states like Colorado and California, where cannabis is legal for both recreational and medical use, business was booming even during the lockdown. This was especially fueled by cannabis's status as an essential item. If this trend continues, cannabis sales will remain strong, as its demand continues to sore across the US.
Take Colorado, for example. The legal cannabis market surpassed $200 million in monthly sales in June. And that's not all. The state went on to set another record in July, with monthly sales reaching an outstanding $224 million, which represents a 13.8% rise. If these numbers are to be considered, the trend is clear: Cannabis is in high demand.
Five Best Cannabis Stocks to Buy
POSaBIT Systems (PBIT, POSAF)
At first glance, POSaBIT systems (CSE: PBIT, OCTMKTS: POSAF) might not be an investment you’d consider. After all, it's just another company out there using handling payments and POS (point-of-sale) for the cannabis industry. But because the company operates in a highly non-competitive world of cannabis finance, it goes to a whole other level.
POSaBIT facilitates non-cash payments across marijuana dispensaries with little to no competition. The company has seen 100% growth this year alone. This trend is expected to continue as it plans to add another five states to the 14 it already serves.
And unlike most tech startups, the company more than breaks even on operating margins. In 2020, it recorded a gross profit margin of $796,742, a massive increase from 2019's $18,483. More gains could be underway as the company continues to expand its team, build new technology, and broaden its customer base.
Apart from POSaBIT's impressive sales record, there is also a tactical element that makes the company's stocks even more alluring. The company has started trading on the American OTC markets under the ticker POSAF. This gives US investors a chance to cash in on the price and reward those already on the company's shares under Canadian listings.
MedMen (MMEN, MMNFF)
What's more alluring than 100% YTD returns, a 1.5x price-to-sales ratio, and a growing interest in up to six US states? These simple facts alone make MedMen (NEO: MMEN, CTCMKTS: MMNFF) one of the most enticing stocks for any investor looking to make a huge profit in 2022.
MedMen's bottom-line losses are shrinking fast. And the company is expanding at an impressive rate. If you include its expansion into Arizona and New York, its revenues were up 2.8% in the third quarter, reaching an outstanding 8.2%.
As much as its sales are hitting the roof, there are still some issues with the company. For starters, the rapid expansion rate means that the company's corporate overhead is burning cash faster than it's coming in. And although it has a $4 million share-based compensation for each quarter (which is pretty high for a startup), it's still short on everything.
On the upside, the more Congress drags its heels on legalizing cannabis on a federal level, the better off the company will be. Due to the delays, MedMen will have enough time to grow its store's footprint without foreign competition. When the US finally allows NYSE and NASDA-listed firms to trade in the country, the company will suddenly become a target for takeover for foreign companies looking to jumpstart their presence in the US.
Also, thanks to the company's relatively weak cash flow, its shares are pretty cheap. At just over 30 cents a share, it won't take much to propel your investment to 10x returns.
MariMed is a former cannabis advisory firm turned operator and licenser. It is one of the most experienced companies on the East Coast. It brought former Sam Adams CMO, Robert Hall, on board as one of its advisors in August.
So, why does this matter? The answer is quite simple: It's very hard to find experienced cannabis teams on the East Coast. Most experienced teams tend to work for more established firms like Harborside and Vibe Growth on the West Coast. This is where intense competition has caused sales to flat-line. But MariMed's focus on the East Coast, where there is relatively little competition, has caused its sales to almost triple in the last year alone.
The company's franchise system can also help it grow expediently. By helping others set up shop, it can expand way faster than vertically integrated players like Green Thumb and Truleive. With a share price of just over $1 and a reasonable 5x P/S ratio, MeriMed can run up 5x returns if it continues to play its cards right.
Trulieve Cannabis Corp (TCNNF)
Over the past year, Trulieve Cannabis Corp has been seeking out acquisitions. This cannabis grower and retailer has its primary focus seated on the Florida medical marijuana market. Trulieve has dominated the sunshine state by accounting for up to 50% of total cannabis sales. This has enabled it to maintain consistent profit margins since 2017.
In October 2021, this multi-state operator acquired Harvest Health & Recreation, yet another multi-state operator based in Arizona that reported revenue of $102.5 million in the second quarter.
This merger gave the company a retail network of 149 dispensaries across 11 states in the US. It has leading market positions in Pennsylvania, Arizona, and Florida. The most recent third quarter marked 14 consecutive three-month periods of profitability. This saw Trulieve raking in $215 million in sales.
Jazz Pharmaceuticals (JAZZ)
In May 2021, Jazz Pharmaceuticals acquired GW Pharmaceuticals, a cannabis-focused biotech company. GW's drug, Epidiolex, is the first cannabis-based drug to be approved by the FDA. Epidiolex, which treats two rare forms of childhood epilepsy, is generating massive sales that are surpassing revenue expectations. Although new patient starts for the drug slowed during the pandemic, the company has continued to show strong revenue returns.
The FDA also approved the drug to treat tuberous sclerosis complex (TSC), a rare organ disease, in August 2020. This approval opens up a huge market for the drug. This is because approximately 1 million people worldwide, 50,000 of them being in the US, suffer from the disease. This will make Jazz Pharmaceuticals shares among the most lucrative deals in the coming years.
How to Invest in Cannabis Stocks
Here are some quick points on understanding and investing in the cannabis industry.
Understand the Various Types of Cannabis Products
Cannabis products come in two types:
- Medical marijuana: Medical marijuana is used for medical purposes. It is derived from CBD and has a THC content of at least 0.3%. Medical marijuana is legal in 35 states in the US and more than 30 countries worldwide. Patients generally require a prescription from a licensed medical practitioner to purchase medical marijuana products.
- Recreational marijuana: Recreational marijuana is legal in 19 states for adult use. It is also legal in Canada, South Africa, Georgia, and Mexico.
Know the Different Types of Cannabis Companies
There are three basic types of companies in the cannabis industry:
- Growers and retailers: Cannabis growers and retailers cultivate cannabis, harvest it, and distribute the end-products to customers. (The process varies by state)
- Ancillary product and service providers: These companies don't deal with cannabis directly. Instead, they provide products and services to dispensaries. These include lighting systems, hydroponic products, management services, packaging materials, and point-of-sale and payment services.
- Cannabis-focused biotech companies: These companies extract cannabinoids from cannabis plants to develop new cannabis drugs. These are far removed from the recreational markets.
Understand the Risks Involved
Investing in any stock comes with a certain degree of risk. And cannabis stocks are no exception. These are some of the risks that come with cannabis stocks:
- Legal and political risks
- Supply and demand imbalance
- Over-the-counter stock risks
- Financial constraints
Keep these in mind when you decide to invest.
What Should You Look for in a Top Cannabis Product?
When you need to purchase any cannabis stock, you should:
- Understand the company's competitive position and growth strategy
- Research the management team
- Scrutinize the company's financial statements
- Evaluate the Top Marijuana Stocks and ETFs
- Invest in your favorite marijuana companies
- Monitor changing cannabis industry dynamics
The Bottom Line
Cannabis stocks have a lot of potential for profitability. That being said, they come with their fair share of risks. But if you are an aggressive investor with high-risk tolerance, you should definitely go for it.
Although the industry is still in its early stages in the US, it has enormous opportunities, especially if the federal legalization bill goes through.