The global trade in legal cannabis is booming.
New Frontier Data, a cannabis research firm, expects total legal sales of cannabis to approach $30 billion by 2025 in the 11 U.S. jurisdictions where the substance was legal as of late 2019 – a 14% annualized growth rate, reports Forbes.
New Frontier Data’s projections are already out of date. In 2020, four additional states legalized cannabis for recreational use: New Jersey, Montana, South Dakota, and Arizona. And New Frontier Data’s projections ignore sales in non-U.S. jurisdictions where cannabis is legal or expected to become legal, such as Canada and Uruguay.
The scale of the market opportunity is all the more remarkable in an industry that operated in defiance of the law until the 1990s, when the first U.S. jurisdictions began regulating medicinal marijuana.
Wall Street is taking notice. The initial public offering market is brisk for businesses devoted to the cultivation, processing, and sale of cannabis and cannabis derivatives. Multiple exchange-traded funds (ETFs) promise exposure to the legal cannabis market, some exclusively. Though differences in opinion abound and enthusiasm isn’t uniform, market analysts are largely bullish on the sector.
Should retail investors follow? That depends.
The legal cannabis industry indeed appears to have a tremendous near-term upside. It’s also far riskier for investors than most other industries, not least because cannabis remains illegal under U.S. federal law.
Moreover, even amid rapid growth in the availability and sophistication of cannabis products and a corresponding increase in cannabis companies’ collective market knowledge, the market is still in its infancy. Cannabis entrepreneurs know cannabis users enjoy consuming the substance. But they’re less confident about what makes a successful cannabis product or product marketing strategy.
Cannabis-curious investors deserve an impartial assessment of where the industry stands today and where it might be going tomorrow. Read on for a detailed look at the bull and bear cases for cannabis investing, notes on evaluating opportunities in the cannabis industry, and an inventory of notable cannabis stocks and funds trading right now.
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Investing in Cannabis: Upside & Potential Risks
Before examining the pro (bull) and con (bear) cases for investing in marijuana stocks and funds, make note of the risks all cannabis investors – bull and bear – could face and what inexperienced investors can do to protect themselves.
As we’ve seen, the cannabis industry carries greater market risk – and promises greater upside – than defensive sectors like utilities. No matter how bullish you are on the long-term profit potential of legal marijuana, you must perform thorough due diligence before putting your money to work in this space. Many cannabis and cannabis-adjacent companies operating today will not exist in recognizable form 10 years from now.
Some companies are better-placed to succeed than others, of course. The stock-picking experts at Motley Fool, for example, have staked their reputations on a single cannabis stock they believe has once-in-a-generation upside potential. (You’ll need to sign up for Motley Fool Stock Advisor, to learn what it is and why the Fool is so bullish on it.)
Expert advice isn’t gospel, of course, no matter how impressive the track record of those dispensing it. Before purchasing shares in any equity, especially in an industry as risky as cannabis, read all offering materials and carefully consider your investing objectives.
The Bull Case for Cannabis
Cannabis is one of the planet’s most popular and durable mind-altering substances.
Recreational and medicinal users have enjoyed cannabis for millennia. Circumstantial evidence dates cannabis use back some 5,000 years, according to a 2017 study published in the journal Pharmacy and Therapeutics. There’s direct evidence of medicinal use dating back to 400 C.E. In modern times, the fortunes of the global trade in illicit cannabis rose in the mid to late 20th century as cultural tolerance of its consumption grew. Among younger users, use peaked in the late 1970s, declined in the 1980s, and rose from the 1990s onward, according to the 2017 research publication “The Health Effects of Cannabis and Cannabinoids” by the Committee on the Health Effects of Marijuana.
Today, tens of millions of adults worldwide regularly use recreational or medicinal cannabis, and many more do so occasionally. New Frontier Data estimates about 38 million U.S. adults consume cannabis at least once annually. Nearly 60% of that cohort use the substance weekly. While millions of users worldwide consume cannabis prescribed by medical professionals under state and national medicinal marijuana laws enacted since the 1990s, most cannabis users don’t have medical clearance. They simply enjoy the drug’s psychotropic effects.
In other words, widespread and persistent consumption of cannabis – both quasi-legal medicinal and illicit recreational – makes for a ready-made legal market for the substance in the U.S. and beyond.
An existing user base isn’t the cannabis industry’s only tailwind today. Marijuana bulls also cite:
1. Liberalizing Attitudes
Americans’ attitudes toward cannabis have grown dramatically more favorable since the late 20th century. In November 2019, a Pew survey found 67% of Americans were in favor of legalizing marijuana. Just 32% opposed legalization. That’s up from only 16% in favor and a whopping 81% opposed in 1989 at the height of the so-called war on drugs.
2. Ripple Effects of Legalization
Widespread and successful legalization campaigns are no doubt partly responsible for the rapid destigmatization of cannabis. Perhaps more important for cannabis entrepreneurs, recent studies, like the one published in JAMA Psychology in late 2019, have found that legalization contributes to increased cannabis consumption, at least initially. This may be because some would-be cannabis consumers avoid the substance for fear of running afoul of the law. Once the government lifts the prohibition, they feel no further compunction to abstain.
3. An Expected End to Federal Prohibition
Most of today’s best cannabis plays remain north of the border, where marijuana is legal for consumption and sale. However, given widespread state-level adoption and rapidly liberalizing public attitudes toward cannabis, many analysts believe federal prohibition’s days are numbered in the United States.
The first rigorous study to look at the question, in 2018, predicted full federal legalization would most likely come sometime in the early 2020s, with a 70% likelihood of federal legalization by 2029, according to Marijuana Moment. Federal legalization would all but assure the legal cannabis industry’s survival in the United States – a boon for investors, who crave nothing if not certainty.
4. Growing International Acceptance.
North America is at the forefront of the worldwide drive to decriminalize or outright legalize marijuana. Between Canada and the growing number of U.S. states where recreational cannabis is legal, more than 100 million North American adults can consume cannabis without fear of reprisal. Outside North America, recreational marijuana is legal only in Uruguay and South Africa.
Still, acceptance is growing throughout the Western world and in many corners of the developing world as well. Progress isn’t uniform, as the Philippines’ government-sanctioned vigilantism targeting low-level drug dealers and consumers makes plain. But the long-term global outlook for cannabis decriminalization is – at this time and in most places – quite bright.
5. Accelerating Innovation
The high-grade cannabis on display at dispensaries in Denver, Seattle, and Boston is not your grandparents’ weed. Nor are the cannabis-infused treats like gummies, candies, cookies, and beverages. Whole categories of cannabis consumables are wont to crop up, seemingly overnight, on the whim of some ingenious entrepreneur. If there’s one thing investors love more than certainty, it’s the market-creating and -growing power of innovation.
Pro tip: If you’re going to add cannabis stocks to your portfolio, make sure you choose the best possible companies. Stock screeners can help you narrow down the choices to companies that meet your requirements. Learn more about our favorite stock screeners.
The Bear Case for Cannabis
Not everyone is enthusiastic about the cannabis industry’s near-term potential. Most concerns stem from the reality that marijuana remains illegal under U.S. federal law and that widespread international legalization continues to be a distant prospect.
Bears commonly cite these arguments to explain why they’re not yet ready to invest in cannabis – or actively bet against the industry’s fortunes by shorting cannabis stocks.
1. Uncertainty Around U.S. Operators’ Access to Capital
When cannabis was illegal the world over, the industry was a cash-only affair, larger operators’ money-laundering schemes notwithstanding. Much to the frustration of aboveboard operators in jurisdictions where marijuana is now legal, the industry remains largely reliant on cash. That’s due to banks’ understandable reticence to work with business clients whose product remains illegal under federal law – and to a corresponding absence of federal legislation to provide cannabis operators with access to financial services without fear of legal blowback.
2. Mixed Data on Cannabis Safety
Following Canada’s legalization of recreational marijuana and legalization measures in several U.S. states, neurobiologist Dr. Marco Leyton’s retrospective meta-analysis of cannabis-related studies found good and bad news for cannabis boosters. On the positive side, Leyton found no significant post-legalization increase in adolescent cannabis use and only temporary increases in traffic fatalities – the latter risk a longstanding talking point of legalization opponents.
On the negative side, Leyton noted the growing and persuasive body of evidence linking habitual cannabis use in adolescents and symptoms of psychosis in users genetically predisposed to the condition. Cannabis skeptics contend that further research may uncover additional health risks of noncombustible cannabis consumption – as distinct from combustible consumption, which has well-established health risks.
3. Retrenchment in Former Safe Havens for Cannabis Use
Marijuana is technically illegal in the Netherlands, but the substance has been legal to sell and consume in specially licensed “coffee shops” there since 1976. The country’s first-mover status in the cannabis decriminalization hierarchy spurred a wave of tourism that locals in major cities – especially Amsterdam, long a bastion of social tolerance – have come to resent. The issue came to a head in 2019, when the Netherlands Tourism Board instituted an official policy of not promoting Holland as a tourist destination – a remarkable decision for an organization charged with attracting international visitors to a small, resource-poor country.
Amsterdam’s situation is unique, with tens of millions of tourists flooding a city of less than 1 million each year. But it may be a leading indicator for other cities where the substance is legal: Vancouver, San Francisco, and Chicago. Should a sustained and widespread backlash emerge against “weed tourism,” state and federal authorities elsewhere may think twice about loosening restrictions on cannabis use.
4. Unfavorable Political Conditions in the United States
Pew’s 2019 study found that a majority of Americans, both Democrats and Republicans, support legalizing cannabis. Self-identified Democrats are significantly more likely to favor legalization, however – 78% support such a move compared with 55% of self-identified Republicans, according to Pew. Republican leaders in the U.S. Senate remain opposed to legalization for now.
President Donald Trump’s administration officially opposed to legalization as well, with Trump’s disdain for substance use a significant factor. (Trump’s older brother, Fred Jr., struggled with alcohol abuse throughout his adult life and died in 1981 at the age of 42.) It’s unclear whether President-elect Joe Biden will expend significant political capital on a push to legalize marijuana at the federal level, but legalization is unlikely to be a top priority during the administration’s first year amid economic turmoil and an ongoing pandemic.
Bottom line: Cannabis is likely to remain illegal at the federal level, at least in the near term, absent a change of heart by Senate and White House leaders.
Top Cannabis Funds for 2020
If you’re sold on the bull case for cannabis, you’re probably wondering how to get started.
An increasingly numerous and enthusiastic cohort of investors is more than happy to invest directly in companies involved in cannabis cultivation, distribution, and derivative activities (such as synthesizing CBD, a non-psychogenic cannabis compound). Our guide to the top cannabis stocks delves into some the best publicly traded cannabis firms operating right now.
Of course, investing directly in individual cannabis stocks is a risky proposition. Many cannabis-curious investors prefer to hedge their bets and invest in cannabis ETFs instead. These multistock cannabis plays offer the upside of exposure to a rapidly growing industry while mitigating the risk inherent in a sector that still operates on the margins of the law.
These funds are among the best on the market today. As you evaluate them, remember that historical performance does not necessarily predict future performance.
- ETFMG Alternative Harvest (NYSE: MJ). ETFMG Alternative Harvest bills itself as the “world’s largest ETF to target the global cannabis industry.” It mirrors the performance of the Prime Alternative Harvest Index, which tracks publicly traded firms in the medicinal and recreational cannabis industries worldwide. Top holdings include Canopy Growth Corp, Aphria, and Tilray.
- Horizons Marijuana Life Sciences (Toronto Stock Exchange: HMMJ). The Horizons Marijuana Life Sciences fund mirrors the performance of the North American Marijuana Index, which is comprised of U.S. and Canadian life sciences companies with significant or principal exposure to the cannabis industry.
- AdvisorShares Pure Cannabis ETF (AMEX: YOLO). YOLO is the first U.S.-based actively managed ETF focused on U.S. and international cannabis companies. The fund targets pure cannabis plays for long-term capital appreciation, which may make it appropriate for investors with longer time horizons.
- American Growth Fund Series Two (AMREX). Unlike YOLO, which limits exposure to pure cannabis plays, AMREX includes small-, mid-, and large-cap companies with tangential exposure to the cannabis industry. Because component firms need not derive the majority of their revenues from cannabis-related activities, AMREX may be more diversified – and more appealing to cannabis skeptics – than pure-play competitors.
Given widespread usage, cultural tolerance, and the inexorable movement toward legalization at the state level, the cannabis industry’s upside is not a mirage. But the industry will remain laden with risk unless and until the substance becomes legal under U.S. federal law. Even if the federal government legalizes cannabis, the industry will remain dicey for investors, with individual stocks – and entire funds – exhibiting far more volatility than equities in more mature industries.
Ethical considerations may also factor into your decision to pursue or avoid cannabis stocks and funds. Some socially responsible investing funds exclude cannabis stocks along with alcohol, tobacco, and gaming stocks. If you’re a proponent of clean living, you may be willing to forgo the profit potential of cannabis as you’ve done with other vices.