How to Invest in Marijuana Stocks

marijuana money stack

Marijuana is the fastest-growing industry in America, growing at a rate of 47% in the latest year. And marijuana stocks are growing even faster.

It’s not hard to understand why.

First, existing users are shifting from the black market to the legal market, where they’re developing bonds with brands, just as people do with cigarettes and alcohol.

Second, the growing acceptance of marijuana in society means people who didn’t use it before are trying it, frequently as a way to address health issues, from pain to depression to insomnia.

And here I’m not just talking about marijuana but also cannabidiol (CBD), the component in cannabis that has therapeutic effects but no psychoactive effects; it doesn’t get you high.

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Even Martha Stewart joined the parade last week by announcing that she’d teamed up with industry leader Canopy Brands in a project to develop CBD products for both humans and their pets.

So it’s very clear to me that the cannabis industry is not just here to stay—it’s going to be a major industry, on par with alcohol and cigarettes, both of which, incidentally, are more harmful than marijuana.

If you’re a growth investor, you can’t afford not to be in this sector. But how do you know what marijuana stocks to buy?

The Biggest Marijuana Stocks: Canopy Growth (CGC) and Cronos (CRON)

Well, the easiest thing to do is to buy the biggest stocks in the industry, Canopy Growth (CGC) and Cronos (CRON). Trouble is, that’s what everyone else has been doing, not least Constellation Brands (STZ), which has bought 38% of Canopy; and Altria (MO), which is buying 45% of Cronos.

As the chart shows, Cronos Group (CRON) has been one of the top marijuana stocks of late.As a result, the valuations of these two companies—here I’m looking at price-to-sales ratios, simply because there are no earnings—are sky-high. Now, it’s entirely possible that these valuations will stay high for a long time; the simple fact that new investors are coming into the sector every day means demand for quality marijuana stocks exceeds supply and that can continue to keep these stocks at lofty valuations for a very long time.

However, I’ve always found that you can do better by going where other investors aren’t, and in this case that means smaller companies that aren’t as well known.

Make More Money in Up Markets

The biggest reason my readers have outperformed the index is simple: we’ve been invested in smaller, less-popular stocks. Some of these are Canadian companies, some are headquartered in the U.S., but all of them are growing fast; in fact, the average revenue growth of these companies in the latest reported quarter was a red-hot 274% from the year-before quarter.

And these companies are still not as popular as Canopy and Cronos!

Lose Less Money in Down Markets

Of course, this year the action in marijuana stocks has been pretty much up, up, up since the beginning of the year. Someday, however, it will turn down, and when it does, my goal is to help my readers lose less than the index. So, just last week, in my latest issue, I made five adjustments to my portfolio, all designed to help my readers lose less when the next correction comes.

Exactly when that correction will come is difficult to pinpoint—and there is no need. By leaning against the wind (which includes taking partial profits and raising cash) I guarantee that when the correction comes, my readers will lose less money than the averages.

And what if you’re just starting out investing in the marijuana sector? For you, I have three simple rules.

3 Rules for Investing in Marijuana Stocks

Rule #1 – Diversify

Diversification is the most important rule of investing, and always has been, because it reduces the pain from any one bad performer. But you don’t want to over-diversify; if you do that, you might as well buy an ETF, and that’s a guarantee of average performance—minus fees, of course.

In my marijuana portfolio, I recently had 16 stocks from which I encouraged readers to construct a substantial diversified portfolio. Now I have a few less.

Rule #2 – Buy on Corrections

In this volatile sector, where many of the stocks are low-priced, it pays to wait for corrections. Used properly, volatility can be your friend. 

Rule #3 – Take Partial Profits When Stocks are High

Conversely, I often recommend taking partial profits when stocks get too extended, or when a position gets overly large. Both these factors increase risk, and I like to help my readers decrease risk whenever possible, as long as it doesn’t reduce their long-term profit potential.

The Bottom Line

By following this strategy, my Cabot Marijuana Investor portfolio is up 44.4% year-to-date, while the Marijuana Index is up “just” 40.0%.

If you’d like to join my happy readers, click here.

Timothy Lutts

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