Tips for Investing in American Cannabis Stocks in 2018

Over the past decade, there has been an increased push toward legalizing marijuana in the United States as well as in the northern neighboring country of Canada. According to ArcView, a cannabis research firm, the North American legal weed industry grew 34% in 2016, reaching $6.9 billion that year.

The legal marijuana industry of weed stocks is expected to grow by an average of 26% per year through 2021.

This percentage is shocking when we consider the legal state of marijuana in the United States just twenty years ago. If this prediction ends up being correct, it means that the legal marijuana stocks market would be worth $21.6 billion in North America by 2021.

The movement to legalize marijuana has gained steam, and the marijuana industry is quickly gaining momentum. In the United States, an October 2017 Gallup survey found an all-time record number of respondents (64%) favored the idea of legalizing marijuana, a polling result that surprised some observers. Normally, this strong support would be expected to put pressure on Congress to consider rescheduling cannabis so that it is no longer Schedule I, or wholly illegal.

Pot stock investors may experience substantial financial benefits if the legislation changes.

There is still considerable risk for pot stock investors. Recently, U.S. Attorney General Jeff Sessions announced that he would rescind the Cole memo, a relatively loose set of rules that legalizing states agreed to follow to placate the federal government. Attorney General Sessions’ one-page memo announcing this move suggested the Cole memo overstepped its bounds and its elimination would allow state prosecutors to bring charges against marijuana businesses, if they so choose. (One can ponder for hours the irony of “states’ rights” advocates being in favor of such a sweeping restriction of states’ ability to self-govern.)

Among the major threats to marijuana stocks investors is the Drug Enforcement Agency’s Schedule classification.

Beyond this recent legal concern, the Drug Enforcement Agency’s Schedule I classification of marijuana also creates problems. Medical cannabis researchers encounter substantial restrictions and bureaucratic headaches, as there is only one federally approved marijuana grow facility in the entire country. This makes running all-important benefit-versus-risk analysis studies difficult. It also prevents the sort of research that would disprove the DEA’s classification of marijuana as Schedule I, which states that pot has no medical value.

Investors in cannabis stocks are impacted by the financial issues faced by marijuana-based businesses.

Most of these businesses have limited access to basic banking services, including something as seemingly simple as a checking account, since they report to the Federal Deposit Insurance Corporation, a federally created entity. Because marijuana is illegal at the federal level, banks could be charged with money laundering if caught providing financial services to the industry, even if marijuana is legal in the state in which the company operates.

Weed stocks receive virtually no corporate income-tax breaks due to U.S. tax code 280E.

This tax code disallows companies selling federally illegal substances, such as marijuana, from taking normal corporate income-tax deductions. Whether or not the weed stock was purchased by someone living in a state in which marijuana is legal is irrelevant.

Despite the legal marijuana industry’s rapid growth in states across America, investing in mmj stocks and pot stocks are not exactly the safest thing you can do financially or legally.

If you choose to invest in pot stocks, some stocks are safer investments than others.

Scotts Miracle-Gro is a great investment bet for people who want the closest thing to a “safe” pot stock investment. By the end of 2017, 89% of the company’s sales were derived from its traditional lawn and garden care business, weather-dependent and tending to fluctuate by a mid-single-digit percentage each year. This is relatively stable, and, as a result, investors understand what to expect from an investment in this stock.

The remaining 11% of Scotts Miracle-Gro sales is derived from its Hawthorne Gardening Co. subsidiary, which caters to the medical cannabis industry. Hawthorne, which in recent years has grown by primarily by acquiring small businesses, focuses on hydroponics (growing plants in a water solvent rich with mineral nutrients), lighting, nutrient, and soil solutions. In 2017 alone, Hawthorne’s sales increased by 131% to $287.2 million, and profits for the segment tripled. As long as the sentiment toward medical cannabis remains generally positive, it seems reasonable that Hawthorne’s growth would continue to be strong.

GW Pharmaceuticals is another “safe” weed stock to consider buying.

GW Pharmaceuticals, the largest cannabinoid-based drug developer, produced an experimental drug and cannabidiol (CBD)-based therapy substance called Epidiolex targeted at two rare types of childhood-onset epilepsy, Dravet syndrome and Lennox-Gastaut syndrome. In the event that the United States federal government further restricts cannabis use, as Attorney General Jeff Sessions seems to want, GW Pharmaceuticals’ lead experimental drug, Epidiolex, could still thrive.

If you want to invest in actual pot growers, the safest cannabis stock appears to be OrganiGram Holdings.

This company, while not currently as successful as Canadian cannabis companies Canopy Growth Corp., Aphria, Aurora Cannabis, or MedReleaf, is losing money–but, most likely, not for long. It is currently in the process of doubling its growth capacity, making it a good bet for a smart investment. Furthermore, as Aurora Cannabis made a hostile bid for CanniMed Therapeutics, a similarly sized Canadian cannabis grower as OrganiGram, this could portend a similar fate for OrganiGram. If Aurora Cannabis fails to acquire CanniMed, it might next go after OrganiGram. In theory, this could put a theoretically high floor under the company’s share price in 2018.

Enterprising investors interested in cannabis stocks are not without options.

U.S. Attorney General Jeff Sessions might be trying to crack down on marijuana use, even in states in which it is legal. If you are willing to roll the dice, you might still be able to walk away with a lot of green by investing in the weed industry.