The marijuana industry is expected to triple in the next five years — and many investors are looking to profit. And there’s one country above all where the stocks are the hottest: Canada.

Canada has become the center of attention for the marijuana industry because, unlike the U.S., marijuana is legal at the federal level. The cannabis industry in the country has exploded, with many Canadian marijuana stocks skyrocketing as well.

As states and entire countries decriminalize or legalize cannabis and/or its components, there are loads of opportunities for entrepreneurs and existing companies.

But as in any nascent industry, there are also loads of risks and bad actors. Whether you’re a first-time investor or a seasoned veteran, it pays to understand all of the moving parts.

This guide will get you up to speed quickly

Canadian Marijuana Market

The first thing for investors to know is that there are two Canadian marijuana markets: medical marijuana and recreational marijuana. Canada legalized medical marijuana in 2001. However, the then-current regulations were geared toward patients growing marijuana for their own medical use.

In 2013, though, new regulations called the Marihuana for Medical Purposes Regulations (MMPR) dramatically changed how medical marijuana could be obtained. Under these regulations, Canadians could no longer grow marijuana at home but instead had to obtain medical marijuana from licensed producers. 

The MMPR didn’t stay in effect for very long. In February 2016, a Canadian federal court ruled that the regulations were unconstitutional because they prohibited Canadians from growing medical marijuana at home. As a result, yet another set of regulations was passed, Access to Cannabis for Medical Purposes Regulations (ACMPR), which retained the licensed producers but also allowed individuals to grow medical marijuana at home. The ACMPR went into effect in August 2016.

In 2015, then-candidate Justin Trudeau promised to legalize and regulate marijuana for recreational use by adults if he was elected Canada’s Prime Minister. Trudeau did go on to win the election. He also made good on his campaign pledge. The Canadian Senate voted a final time to legalize recreational marijuana on June 19, 2018. Under the Cannabis Act (also known as bill C-45), Canadian adults became able to purchase marijuana for recreational purposes beginning Oct. 17, 2018.

As is the case with medical marijuana, recreational marijuana is supplied by licensed producers or can be grown by Canadians for their own use. Canadian provinces are allowed to establish their own regulations about how recreational marijuana will be distributed and sold. 

Not all types of recreational marijuana are permitted yet, though. The rules permit the legal sale and use of dried cannabis, cannabis oil, and cannabis seeds. However, cannabis edibles and cannabis concentrates used for vaping were temporarily excluded. Health Canada, the federal agency in Canada responsible for public health, felt that more time was needed to develop regulations for these types of cannabis products. Finalization of these regulations is expected later in 2019.

Impact of legalization

The number of patients receiving medical marijuana in Canada totaled nearly 270,000 in 2017. This figure soared to more than 340,000 patients in mid-2019. 

As a result, medical marijuana has become a relatively large business in Canada. And despite some predictions that medical cannabis sales could decline with the opening of the adult-use recreational marijuana market in the country, that hasn’t happened so far. 

But it’s the recreational pot market that is expected to really soar. By 2022, recreational sales could approach $5 billion.

The potential for such tremendous sales has attracted more marijuana growers, even prompting produce growers to convert greenhouses to growing marijuana. It’s also generated considerable interest in the Canadian recreational marijuana market, with major beverage makers looking to market cannabis-infused beverages.   

How to Invest in Marijuana Stocks

Follow these seven steps if you’re thinking about buying cannabis stocks. The following is a summary, but we encourage you to read the entire article linked below for all the details.

1. Understand the types of marijuana products.

  • There are two types of cannabis products: medical marijuana vs. recreational marijuana.
  • Cannabidiol (CBD) is a cannabinoid that is different than the psychoactive delta-9 tetrahydrocannabinol (THC).

2. Know the different types of marijuana stocks.

  • Marijuana growers like Canopy Growth Corporation
  • Cannabis-focused biotechs like GW Pharmaceuticals
  • Providers of supporting products and services like Scotts Miracle-Gro

3. Understand the risks of investing in marijuana stocks.

  • Legal and political risks
  • Supply/demand imbalances
  • Risk in those that are over-the-counter stocks

4. Know what to look for in a marijuana stock.

  • Normal stock considerations, including:
    • Management team
    • Growth strategy
    • Competitive position
    • Financials (ideally either profitability or strong balance sheet)
  • Cannabis production costs
    • “All-in” cost of sales per gram
    • Cash cost per gram
  • For Canadian companies, the extent of international operations and distribution
  • Dilution risks via warrants and convertible securities

5. Evaluate the top marijuana stocks and exchange-traded funds (ETFs).

  • Marijuana growers like Canopy Growth, Aurora CannabisTilray, and Aphria
  • Biotechs like GW Pharmaceuticals, Cara Therapeutics, and Insys Therapeutics
  • Ancillary providers like Scotts Miracle-Gro
  • ETFs like Horizons Marijuana Life Sciences ETF and ETFMG Alternative Harvest ETF 

6. Invest carefully.

  • For many, avoiding individual investments in the marijuana space entirely is the right call.
  • For those who buy in, keeping your marijuana exposure to a small percentage of your overall portfolio limits your risk.
  • Pure plays are riskier than more diversified plays.

7. Monitor changing industry dynamics closely.

  • Laws, regulations, competitive forces, and the business strategies of the companies themselves will all change rapidly over time.

Future of the Canadian Marijuana Industry

While the total marijuana market in Canada is likely to increase rapidly over the next several years, the real future of the Canadian marijuana industry is probably going to focus on other countries. Several of the leading Canadian marijuana growers are already forming partnerships and establishing operations in Europe, Australia, and South America.

Germany is currently the biggest and most important marijuana market outside of North America. The country claims the largest population in the European Union. Germany legalized medical marijuana in 2017. Most of the largest Canadian marijuana growers now have subsidiaries in Germany or partnerships with German medical cannabis distributors.

The major Canadian marijuana growers are staying away from the U.S. marijuana market for now. All of the largest marijuana businesses have their stocks listed on the Toronto Stock Exchange, which prohibits members from establishing operations in any jurisdiction where marijuana is illegal at the federal level.

However, the possibility exists that the U.S. could change its laws. Sen. Cory Gardner, a Republican whose home state of Colorado allows the legal use of medical and recreational marijuana, is promoting a bipartisan bill that would prevent the federal government from interfering in states that have legalized marijuana. President Trump has indicated that he will likely support this legislation.

Should laws change in a way that allows Canadian marijuana growers to expand into the U.S., the future of the industry could be very bright indeed. The projected U.S. cannabis market in 2022 is nearly three times the size of the combined marijuana market in the rest of the world, including Canada.

Is now the time to buy Canadian marijuana stocks?

There’s a tremendous amount of hype for Canadian marijuana stocks. Rumors of potential deals with major companies outside of the marijuana industry could add to the feverish expectations. But does that mean it’s time to buy marijuana stocks?

The problem is that valuations already appear to reflect sky-high growth expectations. Tilray shares, for example, trade at 65 times sales. Of the top five stocks discussed, Aphria has the lowest price-to-sales ratio — and it’s still more than 125. Even if growth projections through 2022 are factored in, the top Canadian marijuana stocks trade at price-to-sales multiples several times greater than those of other industries like alcoholic beverages, healthcare products, and tobacco. 

Canadian marijuana stocks are likely to experience significant volatility, in large part due to their high valuations. Investors who prefer to avoid the roller-coaster ride common with volatile stocks are better off staying away.

Over the long run, though, the global marijuana industry should become large enough to present solid growth opportunities for the strongest contenders, including several of the stocks mentioned. For aggressive investors who can stomach the volatility and hang on for the long term, some of the top marijuana stocks could be winners despite their astronomical valuations.