Pot stocks were some of the market’s hottest items in 2018 and 2019 thanks to increased support for legalization in the US and an upswing in prices from Canadian-based companies.
However, marijuana is still illegal in the United States and pot stocks have a hard time getting listed on major US exchanges.
Yes, public sentiment is changing, but investing in marijuana still requires plenty of due diligence. Producers must keep their businesses afloat while juggling massive legal and regulatory restrictions.
Plus, the sector took a beating at the end of 2019 and many investors have been scared away from the sector.
Current Marijuana Laws and Regulation
States across the nation continue to relax their marijuana restrictions, however universal legalization remains in the distance. Marijuana remains a Schedule I controlled substance at the federal level, which creates some interesting conflicts with local governments.
Possessing marijuana might not be a legal violation at the state level in places like Colorado and California, but it’s still technically a federal offense.
While DEA enforcement is pretty much non-existent, businesses involved with production and distribution still have to walk a legal tightrope.
Since pot is still illegal federally, a property owner can kick a marijuana business operator out of their lease with no cause other than the presence of marijuana, even if laws have been relaxed at the state level.
How Have Marijuana Stocks Performed Recently?
Let’s not beat around the bush – weed stocks have taken a pounding in the last few months, long before the COVID-19 virus was at the forefront of investors’ minds.
Shorting marijuana stocks has been a strong trade recently and many of the big names from the 2018-19 trade are languishing.
The Alternative Harvest ETF (MJ), a market cap-weighted fund comprising 37 different marijuana companies, has lost more than 60% over the last 12 months and 42% in the first three months of 2020 alone.
No company had a more dramatic rise and fall than Tilray Inc (TRLY). During a particular crazy 3-day trading period in September of 2018, TRLY shares made a full trip from $120 a share to $300 back to $120.
On September 19th, the share price bounced between $150 and $300 during just a single trading session. Since that 2018 peak, Tilray has tanked and currently trades for less than $4 per share.
Outlook for Marijuana Stocks
Nationwide pot legalization will happen someday.
Support grows more vocal with each passing year and the federal government stands to gain by both taxing marijuana sales and reducing resources spent on current enforcement laws.
But despite long-term optimism, the short-term prospects for weed stocks are murky at best.
With all government resources directed toward fighting the coronavirus, marijuana legalization has become nothing but background noise. Until the pandemic subsides, weed stocks will continue to be a risky trade.
Great for day trading, but not for long-term investing.
Our Top Rated Marijuana Stocks
Most marijuana growers and distributors are small companies that could be hit hard by the coming cash flow crunch caused by COVID-19.
Our top rated marijuana stocks all have a market cap of at least $1 billion and balance sheets strong enough to survive an economic meltdown.
Cronos Group Inc. (CRON)
The Cronos Group is a firm based out of Toronto that invests in Canadian medical marijuana producers.
Current companies operating under the Cronos umbrella include Peace Naturals, Original BC, and Whistler Medical Marijuana Company. CRON shares peaked in January of 2019, but have since declined more than 200%.
Despite this slide, Cronos still has a market cap of $1.94B as of this writing, low debt, and expanding revenue. CRON currently trades at $5.55 per share, which is about where it traded before the pot stock explosion in 2018.
About 9 million shares are traded per day on average with a free float of 189.92 million.
Canopy Growth (CGC)
Another Ontario-based firm, Canopy Growth Company participates in the Canadian medical marijuana market through its subsidiaries Tweed Inc, Bedrocan Canada, and Mettrum Health Corp.
Canopy is one of the largest marijuana companies in Canada with a market cap north of $4 billion. Over 8 million shares are traded daily on average with a free float of 222.92 million.
Canopy has a manageable debt load and has doubled revenue in each of the last four years, so it should be well positioned to survive an economic downturn.
GW Pharmaceuticals (GWPH)
GW Pharma is a biotechnology firm focused on developing medicines based on the ingredients of marijuana plants. Based in Cambridge in the United Kingdom, the company’s prospective drugs include Epidiolex for the treatment of epileptic seizures in children and Sativex for multiple sclerosis.
With over 900 employees, a strong drug pipeline, and a market cap over $2 billion, GW should have no solvency worries during the coronavirus pandemic. About 625,000 shares are traded daily on average and the free float is 30.58 million.
GWPH shares peaked in January 2019 like most marijuana stocks, but didn’t crater following the bust. GWPH has been punished during this current drawdown, but shares look cheap here on a long-term basis.
Scotts Miracle-Gro (SMG)
While Scotts might not be the first company to come to mind when thinking of pot stocks, growers would be lost without the products provided by this lawn care service company.
Scott’s makes Miracle Gro, Turf Builder, Weedol, Roundup, EZ Seed, and a variety of other fertilizers and pest repellents. Growing marijuana is a difficult endeavor and companies depend on Scotts to keep harvests fruitful.
Scotts is also a well-known American company with a market cap over $4.6 billion and a healthy dividend. And unlike most marijuana stocks, the short interest in SMG is low.
Risks With Investing in Marijuana Stocks
Although marijuana stocks are scorching hot right now, there are certain risks you need to know about including increased competition and political risk from the federal government.
Right now, the marijuana industry is growing faster than the pot plants they are selling. However, large biotech companies have taken much of the market share when it comes to providing medical marijuana solutions.
This has enabled them to get a head start over startup companies that have fewer resources.
Problem is others want a piece of this cake. As a result, start-ups are popping up everywhere and will undercut prices to get some of the market share which will ultimately benefit the end-user with more competitive prices but could also limit the potential the bigger company’s have.
However, the marijuana industry is still brand new with a ton of different ways for these companies to capitalize.
Federal Marijuana Laws
Another major risk involved with investing in the marijuana industry is that it is still technically illegal on the Federal level and pot stocks aren’t technically allowed to be listed on any major exchange.
This means that most US marijuana stocks will only be able to trade Over the Counter and that means that they don’t have to adhere to the strict rules and regulations that are set in place to protect investors like financial transparency business initiatives.
That doesn’t mean all companies are deceiving investors it just means that they don’t have as strict of guidelines to follow.
Despite these risks, the marijuana industry is still a force to be reckon with. Popularity is gaining and more states are approving medical marijuana usage with recreational weed right behind it.
Marijuana stocks were a hot item in 2018, but the hype has cooled considerably and many are currently drifting into deep bear markets.
Regulatory concerns will always make pot stocks risky and until full legalization occurs, traders and investors will need to be diligent.
Many marijuana companies will struggle during the coronavirus shutdown and recovery, but the ones listed here should survive this downturn and thrive in the coming years as legislation becomes more favorable.