Investing in the Cannabis Sector: What You Should Know
Investing in the Cannabis Sector: What You Should Know
Monday, February 19th, 2024
An Intro To The Cannabis Industry
The cannabis industry is still relatively new when compared to other, more seasoned industries, such as the fast food, technology, and transportation industry, among others.
Because of this, and its inherently complex nature, legally and politically, the cannabis industry has become a space of interest for many investors.
Currently, as of February 2023, medical marijuana is legal in 38 states and recreational marijuana is legal in 24 states.
Despite cannabis being medically and recreationally legal, it’s still federally illegal and classified as a Schedule 1 narcotic by the U.S. Drug Enforcement Agency (DEA).
A Schedule 1 drug, chemical, or substance, as defined by the DEA, means that it has a high potential for abuse.
This classification has caused many roadblocks for cannabis companies looking to grow their business.
Many different types of companies fall under the cannabis umbrella, as not all are growers or sellers.
Think of companies that analyze data related to cannabis and provide fertilizer, lighting, packaging, distribution services, and banking services.
Even biotech companies developing prescription drugs with cannabinoids (compounds found in cannabis) fall under the cannabis umbrella.
It’s also worth noting that cannabis companies can focus on the medical or recreational part of the cannabis industry, and in some cases, both.
The Cannabis Industry In Today’s World
Today’s cannabis space is constantly evolving, and this is due to the legal and political landscape that, like the cannabis industry, is also everchanging and fluid.
As an investor, observing, staying up-to-date, and having a basic understanding of the cannabis space are critical when deciding whether you want to invest in the space.
The positives can be seen in the revenue the cannabis industry has brought in and the investment that continues to be contributed by private and retail investors.
In terms of economic impact, the cannabis industry is estimated to bring in $130 billion in 2024, up from $38 billion in 2019, nearly a 180% increase!
As you’ll soon find out, private equity is vital for cannabis companies, and data gathered up until May 2023 shows that private equity cannabis deals in North America dropped to a 4-year low.
However, in the past years, many ETFs and mutual funds have become a go-to for retail investors looking for a piece of the pie, and this has helped make up for the drop in private equity deals.
With that said, be mindful that companies that dabble in the cannabis industry in any capacity tend to be restricted or limited in many respects.
Let’s go over a few of the factors to consider when investing in the cannabis industry. We’ll begin with what’s currently hurting the industry.
What’s Hurting The Cannabis Sector?
Cannabis companies are limited in how they finance their operations, manage their banking, and how they structure their business.
Cannabis companies heavily rely on private capital since traditional lenders, such as banks, are hesitant to lend funds due to the federal restrictions placed on cannabis.
Fewer financing options often lead to two scenarios: higher interest rates by those companies that provide lending and requiring owners or partners to front most of the capital before and after the business is in operation.
Since some companies have access to deeper pockets, this inevitably creates a disparity between cannabis companies in terms of their financial success.
Business banking can also become challenging since few banks provide their services to companies in the cannabis sector.
Cannabis companies also face trouble when it comes to structuring their business. Since U.S.-based companies can’t transport marijuana across state lines, they must get creative with structuring their business.
Businesses attempting to expand across state lines end up having to register another business with the same name in that state.
This not only leads to more expenses, it also forces the company to open new production facilities; thus, not allowing them to use economies of scale efficiently.
Lastly, tax-wise, cannabis companies are only allowed to deduct certain expenses, meaning they don’t get the full tax benefits any other company would.
While it seems like there are many obstacles facing the cannabis sector, not all is gloomy; there are many significant, positive changes that are aiding the industry.
What’s Helping The Cannabis Sector?
While the federal government seems to be the most impactful roadblock for the cannabis sector, there are some positive changes on their end that are currently helping the industry grow.
For starters, last year, in 2023, the federal government began allowing doctors to discuss cannabis alternatives for the treatment of various medical conditions.
This, of course, opens the door for individuals to consider cannabis as an actual, proper method of treating their medical condition.
Additionally, the federal government also began allowing federal funding to be used for medical cannabis research.
Another factor helping the cannabis space is the ever-evolving legislation in the U.S. Legislation is constantly changing, whether a Democrat or Republican is leading the nation.
While one party may be more liberal with cannabis in its totality, it doesn’t mean that there aren’t changes being made.
While many of the positive changes stem from federal and political changes, unfortunately, this may be the case for many years to come.
The point of mentioning these federal changes is to show that while changes are being made slowly, at the end of the day, changes are being implemented.
For an industry as complicated as the cannabis industry, it’s a long game that can potentially produce massive gains for investors.
Investing in the Cannabis Space
There are a few different ways you can invest in the cannabis space. Like any other business, there are many publicly traded cannabis companies on the stock market.
Luckily, as the cannabis sector has garnered more attention and approval, there are ETFs (exchange-traded funds) that also specialize in cannabis-related companies.
If you decide to invest in specific cannabis companies, be aware that, like any other company in a growing space, you may experience high volatility, maybe even more, since the cannabis sector isn’t fully accepted by all.
ETFs can help reduce volatility, as investors purchase shares in various companies rather than a single company.
Some ETFs focus solely on U.S.-based cannabis companies, while others take a more international approach by including foreign companies.
Just like you would with any other company outside the cannabis space, consider the company’s financials when deciding on an individual company.
As for an ETF, consider the primary goal, managers, and focus since all will vary and can help when deciding between funds.
The cannabis sector can produce bountiful gains for investors willing to stomach the industry's current risks.
In general, though, the cannabis industry can be more volatile compared to many other industries, so be sure to keep all this in mind when making an investment decision.
Final Thoughts
The cannabis space is in uncharted territory, which can be great or frightening, or maybe both, depending on the angle you’re viewing it from.
Whether you decide to invest or not or wait on the sidelines, it can help to stay updated on the overall sector.
Especially with regulatory changes, it can help you decide whether investing in the cannabis sector is right for you.
Putting aside the whole investing aspect, keeping up to date with all applicable changes can help you educate yourself more on the topic.
And changes will come from all angles, politically, legally, federally, and even from a tax standpoint.
Like any other sector, there are many fallacies surrounding the cannabis industry, and it can help to distinguish what’s valid and what’s not.
Are you currently investing in the cannabis industry? Why or why not? Are you thinking about investing in the cannabis sector?
Let us know your thoughts in the comment section below as we always look forward to reading what you have to say!
Thank you for reading, and remember to Stay Financially Invested!
Don’t forget to follow us on social media!
We post on Instagram, Twitter, and Facebook, so feel free to follow us to stay updated with new articles and posts. You can click on the icons at the top of the page, and it will take you to the corresponding platforms, or if you prefer to search the page, we’ll put the tag names below.
Instagram: financially_invested
Twitter: @fininvested
Facebook: Financially Invested