Investing in Marijuana Stocks

The marijuana industry is expected to expand at a minimum compound annual growth rate of 34% through 2030, and many investors are seeking to profit. As states and entire countries decriminalize or legalize cannabis and/or its components, there are growing opportunities for entrepreneurs and existing companies. This is especially true with the U.S. Drug Enforcement Administration (DEA) moving to reclassify marijuana from a Schedule 1 controlled substance (no accepted medical use and a high potential for abuse) to Schedule 3 (drugs that have moderate to low potential for physical and psychological dependence).

As with any nascent industry, there are also plenty of investment risks. Whether you're a first-time investor or a seasoned veteran, it pays to understand how this industry works. This guide will get you up to speed quickly and includes our picks for the top marijuana stocks.

Best marijuana stocks in 2024

Best marijuana stocks for 2024

1. Green Thumb Industries

Green Thumb ranks among the largest cannabis companies in the U.S. It operates 96 retail cannabis dispensaries and 20 manufacturing facilities across 14 states.

The company has been profitable on an annual basis since 2020. It continues to deliver revenue growth and maintains a strong balance sheet even with headwinds in the macroeconomic and cannabis industry. Green Thumb should have plenty of growth potential over the long term as the U.S. cannabis market expands.

For now, Green Thumb's shares can only be bought and sold on over-the-counter (OTC) markets in the U.S. But if federal cannabis restrictions are lifted, the stock could be listed on major U.S. stock exchanges. This would almost certainly be a huge catalyst for Green Thumb.

2. Trulieve Cannabis

Trulieve Cannabis is the largest cannabis company in the U.S. It operates more than 200 retail cannabis stores in eight states with 16 processing facilities in six states.

The company dominates the market in its home state of Florida. It also claims market-leading positions in Arizona and Pennsylvania. Trulieve could have a significant growth opportunity if Florida citizens vote to legalize recreational marijuana in November 2024.

Like Green Thumb, Trulieve's shares can currently only be traded on OTC markets in the U.S. The stock will likely be a big winner if federal marijuana reforms are made that allow U.S. stock exchanges to list the shares of cannabis companies that operate in the U.S.

3. Innovative Industrial Properties

U.S. cannabis companies can't easily secure capital from banks or financial institutions since marijuana remains illegal at the federal level. Innovative Industrial Properties (IIP) helps to solve the cash shortage for growing marijuana companies. It buys properties owned by U.S. medical cannabis operators and leases the properties back to them. The sale to IIP provides the cannabis operator with much-needed cash, and the lease agreements create a steady revenue stream for IIP.

Innovative Industrial Properties has grown significantly in recent years and now owns more than 100 properties in 19 states. The company continues to generate solid revenue and earnings powered by its sale-leaseback business model, even with some of its tenants facing financial challenges. Because IIP is organized as a real estate investment trust (REIT), it returns at least 90% of its taxable income to shareholders.

In some ways, IIP wouldn't be helped as much by federal cannabis reform as other companies. Its shares already trade on the New York Stock Exchange (NYSE). If traditional banking services were available to U.S. cannabis operators, IIP could face increased competition. However, federal reforms would likely cause the U.S. cannabis market to expand -- which should work in IIP's favor.

4. Quest Diagnostics

Quest Diagnostics might be a surprising pick to include in a list of marijuana stocks. It's one of the world's largest providers of laboratory testing services.

How does Quest tie in with the cannabis industry? The widespread legalization of marijuana in states across the U.S. is driving increasing demand for drug testing in the workplace. Quest offers drug testing services and is certified by the U.S. Department of Health and Human Services for federally mandated drug testing of workers in some safety-sensitive fields.

Quest could be an attractive stock for more risk-averse investors who want to profit from the legalization of cannabis. It has a long track record of success and is consistently profitable.

5. Turning Point Brands

Turning Point Brands is a leader in supplying smoking accessories and oral tobacco. Its products include Zig-Zag rolling papers, Clipper lighters, and Stoker's and Beechnut tobacco products.

The company has especially significant growth opportunities with the legalization of cannabis in the U.S. Turning Point Brands estimates an addressable market of around $200 million in the alternative market for headshops and cannabis dispensaries.

Before you invest

Marijuana stocks overview

Let's cover some of the basics you need to know before investing in marijuana stocks.

• The marijuana industry is divided into three broad categories. Marijuana growers and retailers cultivate and package cannabis products and sell them to consumers. Biotechnology companies develop and market cannabis-based pharmaceutical drugs. Ancillary marijuana businesses provide products and services to cannabis companies without touching the plant.
• Cannabis can be medical or recreational. Medical cannabis patients use cannabis or cannabis extracts to treat health conditions and have recommendations or cannabis prescriptions from physicians. Recreational cannabis users purchase marijuana or cannabis extracts purely for enjoyment and must be 18 or older and living in a jurisdiction where recreational use of the plant is legal.
• Geography matters. Medical cannabis is legal in many more countries than recreational cannabis. In the U.S., cannabis remains illegal at the federal level. However, a growing number of states have legalized medical and/or recreational cannabis. And -- as mentioned earlier -- steps are underway to reschedule marijuana. The rapid growth of the U.S. cannabis market is translating into impressive growth by U.S.-based cannabis companies, while marijuana companies in Canada -- where the plant is already fully legal nationwide -- are expanding more slowly. Canada is one of the global legal markets where supply is outpacing demand and leading to falling cannabis prices.

The COVID-19 pandemic affected nearly every part of the global economy, including the cannabis industry. In many U.S. states, cannabis dispensaries were designated as essential businesses. Cannabis sales boomed in some states during the first few months of the coronavirus outbreak, driven in part by more time spent at home and increased anxiety. Marijuana growers and retailers benefited, as did ancillary providers selling gardening supplies and other products to these companies.

However, not all cannabis companies fared well in the pandemic. Recreational cannabis retailers in tourist destinations such as Las Vegas saw their customer traffic dwindle, causing some dispensaries to start focusing on home delivery. In the medical segment, people delayed doctor visits, causing new patient starts to drop. Biotech companies experienced logistical challenges that affected sales and research progress.

To a large extent, the worst appears to be over for the cannabis market with respect to COVID-19, but some effects are still being felt.

Related investing topics

Should you buy marijuana stocks?

Just because there's a trendy new sector with lots of press and potential growth doesn't mean you need to invest in it. If you buy broad-based index funds, you're covered no matter which sectors of the stock market do well. Conservative investors who prefer lower risk are likely better off avoiding investing in marijuana stocks.

Some marijuana stocks can be highly volatile. This highlights why using margin to buy these stocks should be avoided.

Aggressive investors with high risk tolerances, though, will probably find a lot to like about marijuana stocks. The cannabis industry is still in its early stages. The market opportunities are enormous, especially as more U.S. states legalize cannabis. Investing in these stocks is a high-risk but potentially high-reward proposition.

FAQ