A Simple Guide to Investing in Marijuana
By: Fraud Stamp
Tags: Marijuana Legalization, Marijuana, Cannabis, Investing, Cannabis Industry

We agree this is a stupid question on the face of it. But it is worth exploring because we believe that this very question forms the basis of the potential of this market. These are the five methods:

Smoke it

Inhale through a vaporizer

Eat it — capsule brownie

Lotion to apply to skin

Place a few drops of a liquid under your tongue

The potential is in the non smoking method. Particularly for non smokers where a capsule or a brownie is going to be preferable to a glass bong.

Pricing

It is estimated that legal marijuana is 10% more expensive than its illegal counterpart. The average retail price in the US based on medium quality is $299, it is highest in the East, $319 and lowest in the West, $274.

Here are a few sample prices per ounce by strain:

Illinois $480 Double Dream

Wyoming $140 Durban Poison

Mexico $50 The lime

Venezuela $140 Columbian Gold

Australia $400 Bubblegum

The Most Expensive

The most expensive countries to buy marijuana in the world is the United Emirates with an average price of 102 euro per gram, next is Brunei at 68 euros per gram, Japan at 63 euros, Estonia 23 euros, Singapore 20 euros and Ecuador 19 euros.

The Cheapest

India is the world’s cheapest. At 0.08 euro per gram, the cannabis plant is native to India. South Africa is next at 0.092 euro, Nigeria 0.185 euro, Brazil 0.278 euro, Columbia 0.370 euro, Dominican Republic 0.463 euro, China 0.740 euro. Out of interest Afghanistan is about 4 euro per gram.

1 Euro = 1.20 USD

Markets Outside the US

Although the US market represents 25% of the global cannabis market it is projected that legal cannabis sales are projected to represent 72% of total global sales by 2025.

Outside the US there are only two countries where recreational marijuana is legal, Canada and Uruguay.

A few other countries of note include:

Israel — One of the top medical cannabis importers in the world. It also has one of the most progressive medical cannabis industries in the world.

Luxembourg — Although a small country it is expected to be the first in the EU that makes recreational marijuana legal.

Germany — has the biggest market for medical use cannabis in the world and the largest importer.

Italy — Is the second largest for medical use marijuana.

Argentina, Columbia, Chile and Peru permit medical use marijuana.

Australia and NZ — allow medical use marijuana.

England — allow medical use marijuana, although there are many restrictions which have severely restricted this market.

Mexico — Is close to legalizing recreational marijuana although it could be a few years before various hurdles/formalities are overcome and consumers can start buying legally.

Cannabis in all forms is illegal throughout Asia although Thailand began allowing medical use of cannabis and more recently allowed it to be infused into food stuffs.

Where is the Money being Spent?

The vast majority of money is being spent on flower cannabis. That market represents over 50% of the total market, in some states it is over 70%. Concentrates and edibles are eating into this market as they experience higher growth. There is also an increased use of vaping products which despite a setback have carved out around 10–15% of the market and growing. The reality is for this market to grow and become mainstream there must be alternatives to the bong and the ‘joint’ and this is where vaping and edibles can potentially expand this market beyond all recognition.

Licensing

When a state legalizes cannabis that doesn’t mean that anyone can open up a store and start selling marijuana. This is only the first step. However it does depend on the state as some have made the process more complex than others. Take California for example. California has one of the most complex systems in place. With 58 counties and 482 incorporated cities, each municipality has the power to create their own unique set of requirements. Although already a big market it still has massive potential as only 20% of California’s cities have implemented cannabis regulation.

A wannabe cannabis grower or retailer will have to obtain a license and that is not a cheap process. In California there are a range of annual fees payable ranging from ‘Speciality Cottage Outdoor’ at $135 per year to ‘Medium Indoor’ costing $77,905 a year. The Colorado system is more streamlined with only 6 tiers compared to Californians 16. Fees are also significantly cheaper with a maximum annual fee of $5,300.

Many states and municipalities restrict the number of cannabis businesses. As well as licensing requirements some of the other barriers to entry include high application fees, strict regulations, stringent financial reporting and management requirements. Patience is essential when applying for a cannabis license. It can take over two years and costs can reach $300,000 plus.

A Few Myth Busters

There are many myths floating around about the effects of marijuana use. Here are the main ones.

You can’t overdose on weed…

You can, but it won’t be fatal.

Weed is not addictive…

It is. The addictive potential of marijuana is linked to THC.

It is a natural plant so it can’t be that bad…

While it can’t directly kill you, it isn’t risk free. Regular marijuana use has been shown to be associated with long term problems, including poor academic performance, memory loss and lung cancer. To a developing brain, like those of teenagers, marijuana can be especially toxic.

Marijuana use causes cancer…

It’s true that marijuana smoke, like tobacco smoke, contains carcinogens. But even hardcore pot smokers typically consume much less pot than tobacco smokers do cigarettes, probably not enough to cause cancer.

Marijuana is a ‘gateway’ drug…

People who use marijuana are statistically more likely to go on to use other drugs, but that doesn’t mean marijuana use causes use of other drugs. A report by the Institute of Medicine found ‘no conclusive evidence that the drug effects of marijuana are causally linked to the subsequent abuse of other illicit drugs’.

Growing cannabis is easy money…

It is true that the profit margins are extraordinarily high in the cannabis business. There is also a mismatch of demand and supply in most states with insufficient legal dispensaries to fulfill demand. But to counter this there are many issues that make this a hard business to operate in including high set up costs, regulation, security, specialist skills required to ensure a consistent quality crop and of course competition, not just from other legal operators but from the black market.

The Future

The recent US election saw five further states legalize marijuana in some shape or form. The potential however is all wrapped up in whether marijuana is legalized on a federal level. There is a possibility that the control of the Senate could swing to the Democrats as early as January and whilst legalization would not happen immediately it would definitely increase its chances in the short to medium term and probably by the end of Biden’s first term. The legalization of marijuana on a federal level is a game changer on so many levels.

It would legitimize many of the US operators allowing them to make the most of their economies of scale and export across state lines and as significantly export to countries that allow medical marijuana. It will allow companies to access capital and drive expansion. Also, as we saw in Canada, it is likely that mainstream tobacco and liquor companies will make strategic investments and acquisitions in the US which they are prevented from doing now. Legalizing the industry will provide many opportunities bearing in mind however that there are many a slip between cup and lip!

There is one other major development apart from the legalization of marijuana on a federal level and that is something called The SAFE Banking Act — The Secure and Fair Enforcement Banking Act. This bill allows cannabis businesses to work freely with banks. This is currently a major obstacle for marijuana businesses as regards payment processing, access to working capital and other banking services. The House passed the bill back in May 2020 and it heads to the Senate which has never passed cannabis banking legislation. It is unlikely however this bill will pass without the Democrats taking control, but there is a chance.

Investment Opportunities

‘As of 2018, US recreational and medical cannabis have penetrated just 8% and 21% of their estimated markets, respectively. Based on our state by state analysis we forecast nearly 25% average annual growth for the US recreational market and nearly 15% for the medical market through 2030.’ Morningstar

This is the opportunity, without federal legalization. With federal legalization the opportunity becomes so much bigger.

What we are going to explore in this next section is how as an investor we can benefit from this phenomenal growth.

Cannabis related companies fall into a number of categories including agriculture, retail, pharmaceuticals, biotechnology, healthcare, household products, cosmetics and even real estate trusts.

How Listed Cannabis Investments Work

Cannabis stocks v traditional stocks

Publicly traded stocks on major exchanges usually have at least 70% of their shares held by institutional investors. Because US based cannabis companies are reliant on private sources of capital to fund their business retail investors typically make up 91% of all cannabis stocks. This makes for a very volatile stock price.

Generally Canadian cannabis companies can list in the US and the Toronto Stock Exchange (TRX). US based cannabis companies however have limited options. Exchanges in the US are out of bounds for them. Their options are restricted to the US over the counter market (i.e. matched bargain) or a listing on the smaller Canadian Stock Exchange.

Investors wanting exposure to the US market should be targeting US based companies as their Canadian counterparts are unable to operate in the US. Although Canadian cannabis stocks do have potential with their ability to export to other markets in our opinion the action is in the US.

So how do investors gain exposure to the US market?

They can invest in a range of listed US stocks on the Canadian Stock Exchange or the US OTC but we must remember these stocks are volatile and in the main illiquid meaning to purchase a meaningful amount of stock the spreads are potentially substantially wider than quoted. Below are four US based companies that are worth a closer look:

Curaleaf (CURA) $7.10bn Dispensary operator

Green Thumb Industries (GTII) $4.70bn Dispensary operator

Trulieve Cannabis (TRUL) $3.88bn Focused on medical in Florida

Cresco Labs (CRLBF) $3.78bn Dispensary operator

The only problem is many of these stocks have increased in value by over 300% from their low point in 2020 thus already factoring in the good news in the market. However an investor can look to buy on weakness and accumulate stock in these larger operators. Alternatively search out smaller operators which are only just emerging. Although a higher risk strategy you could add one or two of these smaller companies to a larger portfolio of US based cannabis stocks to diversify company risk.

Rather than conducting your own extensive research you can buy an ETF (exchange traded fund). There are a few of these to choose from all offering different strategies and varying sizes.

The two top ETFs in this space are:

ETFMG Alternative Harvest with a market cap of $1.25bn. This ETF has a holding of 50 stocks with just 7 stocks representing 65% of their holdings. Much of the exposure however is in Canadian based companies with the exception of GW Pharma a UK based medical marijuana drug development company.

Horizons Marijuana Life Sciences with a market cap of $740m. This ETF is mainly focused on the medical marijuana market.

There are a number of other cannabis focused ETFs but these are much smaller i.e. sub $50m. And whilst many of these do focus on the US market their small size means trading in them can be expensive. One of the better ones is AdvisorShares Pure Cannabis ETF (YOLO). Its assets under management is around $62m and is primarily focused on US and Canadian based companies offering consumer products.

Investing in cannabis stocks is probably the safest way to gain exposure to this market — although safe and cannabis does not go together. Some may say we are in a bubble right now with the recent massive increase in share prices. If you are a risk taking value seeking investor what other options are available to you?

Crowdfunding — There are a number of specialist crowdfunding platforms that specialize in cannabis based businesses. This is a high risk high reward way of investing. One of your main considerations is to ensure that the valuation is not ridiculous — that is the sin of many of these platforms. In crowd funded or private investments it is imperative you conduct your own due diligence on the management team and the opportunity. Don’t take the entrepreneurs word for it. However there will undoubtedly be a few gems amongst the crap where you are able to invest at the ground level of a startup. But be very careful.

Cryptocurrency — Believe it or not there is an opportunity to buy cryptocurrencies that have exposure to the cannabis market. A few cryptocurrencies are looking to assist the cannabis market in overcoming its reliance on cash. A good cryptocurrency solution in this space is long overdue and could be very lucrative.

An Alternative Investment Strategy — The cannabis market can be broken down into plant touching and ancillary. A wise investor may look to explore opportunities in the ancillary market which isn’t quite so hot as the cannabis touching market. It is a forgone conclusion that if and when federal law changes the competition will heat up to the point where there will be an oversupply. By selling picks and shovels, as in the days of the California gold rush, this could be a good investment strategy in preparation for the arrival of the real green rush.

Risks from Scammers

We hope you all realize that wherever there are big opportunities it is fertile ground for the scammer. That will take many forms including overvalued or fictitious companies listed on crowdfunding sites. Investment schemes offering above average returns, limited time opportunities to invest in the next big thing. A popular ruse is ’buy now before we are granted our license when the stock price is going to skyrocket’ the problem is there is no license. Avoid the get rich quick schemes.

Conclusion

2019 was the year of the bear in the marijuana market. Prices plummeted when it became obvious that stocks had been overbought on unrealized promises. Companies continued to make big losses and failed to realize the potential.

The potential since the US election is even greater compared to 2018 before the market correction. Prices of listed cannabis stocks however have raced ahead in anticipation. In our opinion they are due for a major correction however that assessment could all change if marijuana becomes legal at a federal level. The market will quickly overlook the problems at the micro level as it races ahead. The big question is do you buy now or wait?

It is never a good time to buy. It is always a good time to buy. We think that investors should consider buying exposure to the market now but keep some powder dry to see how things play out in the next six months. And remember only invest what you can afford to lose because with this hugely volatile market prices could easily halve if the market becomes nervous over slow progress or an unexpected sidewinder.

Visit us at www.fraudstamp.com or follow us on Twitter or instagram: @fraudstamp

No Financial Advice

This article does not constitute financial advice in any way. The article should be treated as supplementary information to add to your existing knowledge