After years of stigma around cannabis, suddenly people are talking openly about investing in hemp stocks.
A couple weeks back, we overheard a local UPS driver shared how his wife just got her medical marijuana card and that he’s been putting money into cannabis stocks and was making a killing. After hearing about the driver’s huge success, two thoughts came to mind. The first was how cool it was talking so casually about cannabis and marijuana stocks, second was how do we get in on this?
Almost immediately, the writer perused some popular marijuana stocks and learned that many investors were in fact making money hand over fist buying marijuana stocks, but not everyone was. The cannabis market as a whole is extremely volatile, which means it’s very easy to quickly make and lose money.
However, this doesn’t mean one should shy away from these stocks. Ask a stock broker and they will most likely tell you that a diverse portfolio of mixed stocks performs best on average. Meaning, it’s about risk tolerance and balance and volatile cannabis stocks should be a small part of a stock portfolio, not the other way around.
In this article we’re going to share some “hot stocks” in the marketplace, including details on our UPS driver’s stock and share some important market information, as well as things to look out for should one decide to invest. Remember, all investments carry risk and investors need to weigh any and all risks before investing in the stock market.
INVESTING IN HEMP STOCKS: UNDERSTANDING CANNABIS MARKETS
To start, it’s important to first take a look at the entire cannabis market as a whole. This can help answer some very basic questions for investors. For example, is the industry moving in the right direction? Are certain industry sectors doing better than others? Is one more risky than another? Of course, these are just a few questions one should be asking, there are many more.
Let’s take a look at the cannabis market information as reported by Grandview Research. In 2016 the U.S. Legal marijuana market size was estimated at 7.06 billion and expected to grow at CAGR of 24.9 percent from 2017 to 2025. Globally the industry is expected to reach $32billion.
Of the two marijuana segments, medical marijuana was the largest segment and estimated to be valued at USD 100.03 billion by 2025.
When it came to products, the marijuana buds segment was estimated to be the dominant type and is estimated to be valued at USD $82.9 billion by 2025.
Cannabis Industry Sectors
Marijuana sector breakdowns were not easy to come by and choices were few. Of all the ones perused, Bloomberg’s chart was the most detailed. Even though these numbers are a few years old and market share has probably shifted some, most likely it hasn’t changed enough to significantly change the order.
- Pharma/Research USD $1.5b
- Producer USD $645m
- Consumer USD $302m
- Real Estate USD $216m
- Consulting USD $170m
- Tech USD $162m
- Industrials USD $54m
LOOKING AT CANNABIS STOCK INDICES
We’ve all heard of the Dow Jones and the S&P 500 stock indices. These major stock indices consist of groups of stocks whose combined daily performance is an indicator of how a market is doing without having to track individual stocks. According to Investopedia, “investors and other market participants use indexes to track the performance of the stock market.”
Cannabis stocks have their own stock indexes and there are plenty to choose from. Each index will have their own set of guidelines outlining the requirements a company must meet in order to be listed on that particular index. Below are three major cannabis indices.
Global Cannabis Stock Index (GCSI)
GCSI has been in existence since 2013 and they represent the overall publicly traded market for the medical and legal marijuana sector. There are currently 61 cannabis related companies listed on the index and is rebalanced every quarter. The last rebalance took place in September and each stock was required to have an average daily trading value in excess of $600,000 and a minimum price of at least $0.25 (10-day average). Lastly, Canadian and Australian companies must have a U.S. listing in order to be included in the index.
North American Marijuana Index (NAMI)
The NAMI tracks leading stocks in the legal cannabis industry in the United States and Canada. The North American Marijuana Index is broken down by 2 sub-indices: The U.S. Marijuana Index and the Canadian Marijuana Index. Where a company is primarily operating determines which sub-index they’ll be listed.
The NAMI began on January 2, 2015 with an inception of 100 points. Both indices are rebalanced quarterly on the last day of March, June, September, and December of each year.
To be included, companies must meet minimum trading requirements. They must have a market capitalization of $80 million, daily trading volume of $2million and a share price of at least $1.00. Companies with $5 million of revenues over the prior years are exempt from the above trading requirements.
The Green Market Report Index
This is the newest of the cannabis indices. The Green Market Report Index officially launched January 31, 2018. This index consists of 30 stocks selected based on market capitalization, revenue production, plus high standards of company operations. They focus solely on pure cannabis companies with a rebalance review each quarter.
HOW TO INVEST IN HEMP
Now before you go calling your local stockbroker, it’s important to remember that while some investors make money buying cannabis stocks, many others do not. As with any investing, it’s important that you do your own research. The Motley Fool recently published an article on investing in marijuana stocks. Below is a synapsis of some key points.
Understand The Different Markets
There are basically two markets when it comes to cannabis: medical and recreational marijuana. Medical marijuana is legal in 30 U.S. states and recreational legal in nine states. One of the most commonly used medical marijuana products is cannabidiol (CBD).
Know the marketplace you want to invest in
When it comes to cannabis, there are three type of cannabis stocks
- Marijuana growers — These companies cultivate, harvest and distribute to the end customer.
- Cannabis biotech’s — These companies focus on developing cannabinoid drugs.
- Providers or ancillary products and services — These companies provide products and services to growers, such as; lighting, hydroponic systems, etc.
Understand the risks and what you’re willing to lose
For cannabis stocks, the biggest risk is the legal and political issue facing the industry. While some states have approved either both recreational and medical marijuana, or simply for medical use, but regardless cannabis is still federally illegal.
Imbalances can happen for a variety of reasons. With regards to the marijuana industry, many cannabis stock prices are valued higher than they’re worth. For example, a stock price might be overinflated because of potential future growth that analyst’s price into the present day stock price.
This can pose huge risks to the marketplace later on once the huge growth is achieved. It’s very likely the growth targets will cause a supply gut.
HOT STOCK PICKS: CANNABIS STOCKS
To give you an idea of how hot the cannabis market is, just take a look at the United States Marijuana Index.
According to Investopedia, “As of June 29, 2018 the United States Marijuana Index, despite a lot of uncertainty around regulations, has over the past 1 year gained 71.49 percent, as compared to about 12 percent gain seen by the S&P 500. Given that is not exactly an apples to apples comparison, but it does make a case to at least investigate investments in marijuana stocks.”
Tilray is listed on NASDAQ. This stock is interesting because the stock was only issued to the public this past July and has already jumped over 600 percent from it’s first day IPO price. This was the first marijuana stock to go public with only 9 million shares being offered.
Many believe that Tilray could see a steep decline in the future, but for now, it’s being used to speculate the future of legalized marijuana in Canada.
- Average Trade Volume: 8,175,928
- Market Cap: 9.406B
- Price/Earnings Ratio (TTM): N/A
- Earning Per Share (TTM): -.030
Canopy Growth (CGC)
Canopy Growth is listed on the NYSE. So far in 2018 this stock has climbed 100 percent. This cannabis producer has received multiple rounds of investments from beverage specialist Constellation Brands (NYSE:STZ). Many are speculating Constellation Brands will eventually buy them outright and add cannabis to its lines of brands like Corona and Svedka.
- Average Trade Volume: 1,984,482
- Market Cap: $5.98B
- P/E ratio (TTM): N/A
- EPS (TTM): $.0950
Aurora Cannabis (ACBFF)
Aurora Cannabis, Inc. is listed on the OTC market. ACBFF is another big Canadian pot company. Last March, Aurora Cannabis acquired rival MedReleaf in a .25 billion all stock deal. According to the original press release, combined, these two companies expect to produce over 570kg per year of cannabis.
- Average Trade Volume: 1,857,787
- Market Cap: $4.101B
- P/E Ratio (TTM): N/A
- EPS (TTM): -$.03
GW Pharmaceuticals (GWPH)***
GW Pharmaceuticals is listed on the NASDAQ as an American Depository Receipt (ADR). This UK Company had a huge win this past June when the FDA approved the first drug of its kind derived from pure plant CBD called Epidiolex. This drug is approved for treatment of epileptic seizures associated with Lennox-Gastaut syndrome and Dravet syndrome.
- Average Daily Trading Volume: 463,151
- Market Cap: $3.918B
- P/E Ratio (TTM): N/A
- EPS (TTM): -$9.67
Stock information provided by Investopedia.
HEMP STOCKS TO WATCH
While these two stocks haven’t experienced huge jumps like Tilray and Canopy Growth, both of these hemp companies are poised for breakouts. Also, both have stock prices near $1 per share, which may be a good opportunity for newbie investors to start with.
Global Hemp Group, Inc (OTCMKTS:GBHPF)
Global Hemp Group is listed on the over-the-counter market. GBHPF is a Canada-based company with operations in Montreal, Canada and Los Angeles, California. Currently Global Hemp Group is completing it’s hemp cultivation projects in New Brunswick, Canada, Oregon and the United States.
Global Hemp plans to develop value-added industrial hemp-based CBD products next.
- Average Trade Volume: 192.17k
- Market Cap: NA
- P/E ratio: NA
- EPS: NA
Hempco Food and Fiber (OTCMKTS:HEMP)
Hemp, Inc is listed on the over-the-counter market. Hempco Food and Fiver is a producer and distributor of hemp-based products. They have a 56,000 sq. ft processing facility in Alberta, Canada, where they produce hemp-based foods. With the legalization of cannabis, Hempco plans to utilize the hemp stalk as a fiber source for industrial building and textile uses.
In 2019, Hempco expects hemp production capacity of 240,000 lbs/month.
- Average Trade Volume: 32.13M
- Market Cap: 6.68M
- P/E Ratio: NA
- EPS: $ -0.02
Stock information provided by 420intel.com.
WHERE TO LEARN MORE ABOUT INVESTING IN HEMP
Hopefully this article has whet your appetite to the huge potential hemp and cannabis stocks have right now and in the foreseeable future. As already stated, it’s very important that investors do their homework and due diligence before taking on any investment. To help get you started, below are some educational resources that offer valuable content.
- Investing 101 (Investopedia)
- How To Start Investing With Only $1000 (NASDAQ)
- Marijuana Stocks To Buy & Watch (Investor’s Business Daily)
- Avoid These Obvious Mistakes When Investing In Cannabis Stocks (Forbes)
- Cannabis Stocks On The TSX (Seeking Alpha)
- A Crash Course For Investors On Ihe Lingo of (Legal) Weed (Bloomberg Businessweek)
IN CONCLUSION: HEMP STOCKS REPRESENT AN EXCITING, VOLATILE INDUSTRY
As the cannabis industry continues to evolve there will bound to be more volatility in the marketplace just like we see today, as well as new hot-stocks to buy. We’ve included links throughout this article to help you learn more. It’s the perfect time to learn about this exciting industry. And who knows, you might end up sharing the killing you made trading cannabis stocks just like our UPS driver!
Disclosure: Rob Railis owns stock positions in various industries. He does not own any positions in the stocks outlined in this article. Our Editor in Chief Kit O’Connell owns two shares of CGC, one of the stocks mentioned in this article, in addition to stock positions in various industries including a small number of shares of other cannabis stocks.