The Ins and Outs of Investing in Marijuana Penny Stocks
As marijuana penny stocks get more attention on 4/20, how can investors identify value in the cannabis industry? There are a few aspects to consider before putting any money into a marijuana stock. But before we get into those, let’s first discuss why the cannabis industry is so popular right now.
Aside from the widespread legalization that has occurred in the U.S., demand for marijuana has dramatically increased over the past year and a half. When the pandemic first hit, we saw this demand spike very quickly due to people being at home more than ever before.
While the industry has come a long way over the past five years or so, there is still a long way to go. One of the major issues right now is regarding banking. Because cannabis is still federally illegal, cannabis companies do not have access to banking services. This includes everything from credit card processing to business loans and more.
A few months ago, Chuck Schumer, the Senate Majority Leader, stated that he would get to work on marijuana legalization at the federal level. On April 20th, lawmakers approved legislation that would allow banks to offer services to the cannabis industry in a 321-101 vote.
While this bill still has to go to the Senate for approval, the “SAFE Banking Act” would be a major game-changer for the cannabis industry if approved. Now, there are a lot of nuances to consider before investing in marijuana penny stocks. With this in mind, let’s take a look at what those nuances are and a few top marijuana penny stocks in 2021.
Investing in Marijuana Penny Stocks: 3 Things to Know
- What Cannabis Legalization Looks Like in the U.S.
- The Different Types of Marijuana Penny Stocks
- Picking a (Marijuana) Penny Stock Plus 3 Marijuana Penny Stocks to Watch
1. What Cannabis Legalization Looks Like in the U.S.
In the U.S., the cannabis industry continues to see record demand. Across the country, recreational marijuana is legal in 16 states and medicinal marijuana is legal in 36. The most recent state to legalize cannabis is New York, which did so on March 31st of this year. While New Mexico and Virginia both legalized cannabis recently as well, these states will not offer cannabis until at least this summer.
In 2020, research from Gallup showed that the U.S. cannabis industry was worth more than $61 billion. Throughout 2020, sales for cannabis across the country rose by almost 70%. This is an incredible growth rate and something that is almost incomparable to other industries.
As mentioned above, the major issue with cannabis legislation right now is banking. The lack of nationwide legal measures for cannabis banking puts both dispensaries and their employees in a dangerous situation. Hence, the SAFE Banking Act.
While this bill has fumbled around the various sectors of the federal government, investors are hoping for progress in the coming months. So because the cannabis industry is growing extremely fast, marijuana penny stocks could be worth looking into as long as the legislation progresses.
2. The Different Types of Marijuana Penny Stocks
To understand marijuana stocks in general, we have to define the different areas of the industry. For clarity’s sake, let’s start at the top with the most pure-play pot stocks, and work our way down.
First, we have marijuana growers. This includes companies that grow large quantities of cannabis, which are then sold as either a wholesale product or vertically through its retailers. These marijuana stocks can be a good option for some, but they tend to have the highest exposure to the cannabis industry. This means that they can be more volatile than others.
Next on the list, we have cannabis retailers and MSOs or multi-state operators. This is pretty straightforward as these companies sell cannabis directly to consumers. However, with MSOs, we have seen very high margins and more consistency than with some larger marijuana-growing penny stocks.
This is because they are more exposed to the consumer market rather than the wholesale demand for cannabis. With demand rising for marijuana substantially in the past year, many of these companies have shown record profitability and earnings.
In tandem with this category, we have ESPs or extraction service providers. These companies produce extracted versions of marijuana including oil, wax, and tinctures. The products that ESPs produce can then be used in everything from edibles to drinks and more. Again, the margins with ESPs are similarly high when compared to MSOs and cannabis retailers. This makes them an interesting choice for potential marijuana penny stock investors.
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Last on the list, we have ancillary marijuana stocks. This includes everything from cannabis-focused REITs to packaging providers and everything in between. These companies tend to have less exposure to the volatility of the cannabis industry, which can be a plus for some investors. While all of these industries have different value points, they all could have something to offer depending on the individual investor. With this in mind, which industry is your favorite to find penny stocks in?
3. Picking a (Marijuana) Penny Stock Plus 3 Marijuana Penny Stocks to Watch
Picking a cannabis-focused penny stock can be as easy as finding any other penny stocks to buy. However, we have to take into account factors such as production quantity, profitability, and long-term plans. Because investing in penny stocks is very similar to investing in cannabis penny stocks, let’s look at some brief factors to consider.
First, investors need to understand where a company is at financially. This means pouring through balance sheets to understand the intricacies of its financial situation. With this information, investors should look for factors such as positive EBITDA, EPS, or earnings per share, the trajectory it has taken in the past few months, and occasionally, what analysts are saying. Additionally, it’s important to educate oneself in the complexities of trading penny stocks, as learning will always be your most valuable tool.
2 Marijuana Penny Stocks to Watch
Harvest Health & Recreation Inc. (OTCMKTS: HRVSF)
Harvest Health & Recreation Inc. is a vertically integrated cannabis retailer and multi-state operator. It is based in Arizona but has a presence around the U.S. It engages in the production and retail sales of cannabis and cannabis-infused products as well as providing its offerings to other retailers throughout the country.
In its fourth-quarter and full-year results announced a few weeks ago, the company managed to increase revenue by almost 100% over 2019, to $231 million in 2020. Additionally, fourth-quarter revenue alone shot up by almost 85% from Q4 2019 to Q4 2020, representing the large demand increase due to the pandemic. HRVSF is a good example of a marijuana penny stock that has remained relatively under the radar for some time. Because of this, it could be worth watching.
4Front Ventures Corp. (OTCMKTS: FFNTF)
4Front Ventures is another MSO penny stock, however it works in the production of low-cost, high-quality branded cannabis products. It has over 25 brands in its pipeline including Marmas, Crystal Clear, Funky Monkey, and several others.
As a vertically integrated producer, 4Front Ventures can see higher margins than many of its non-vertical competitors. Similar to HRVSF, 4Front announced its fourth quarter and full-year 2020 fiscal results a few weeks ago.
In the results, the company managed to grow its adjusted EBITDA by almost 60% sequentially to $5.9 million. Also, it states that its long-term licensing deals could provide roughly $650 million and $250 million in revenue and EBITDA respectively.
Both of these cannabis penny stocks show that there is a lot of growth occurring in the industry right now. So considering the above information, is FFNTF a penny stock to watch?