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Thanks to the decriminalization of US hemp production in 2018, the North American CBD industry has experienced exceptional growth. Many financial analysts have gone so far as to claim that hemp oil could be the industry with the higher rate of growth on Wall Street. Some business experts predict sales of CBD products alone could reach over $20 billion within a few years.
Savvy traders have made a ton of money investing in hemp companies between 2017 and 2018. Amazingly, some of these stocks have jumped well over 70 percent within only a few months. This doesn’t mean, however, that you’re too late to the party. Yes, many of these stocks have already had tremendous runs, but the hemp industry is still in its initial stages.
If you believe in the long-term future of hemp and CBD oil, then you might want to consider investing in the industry now. In this article, we’ll break down the three primary ways to play the hemp industry and share a few names to consider.
One crucial consideration potential investors need to address is which segment of the hemp industry they want to place their money in. Usually, analysts split the hemp industry into three groups: growers, medical companies, and service providers. Understanding what each of these business segments is responsible for can help you manage your risk exposure.
Growers are obviously involved in the cultivation and harvesting of hemp. Depending on the company, these growers could be focused on harvesting hemp for medical purposes, industry, and/or recreational use.
With the passage of the 2018 US Farm Bill, American farmers can now legally grow hemp. Many US farms have taken advantage of the high demand for CBD by devoting thousands of acres to hemp cultivation. A recent study conducted by Hemp Crop Report found that US hemp cultivation was only about 23,300 acres in 2017, but that number expanded to 77,000 acres in 2018.
Many farmers say hemp cultivation is far more profitable than other plants in this new environment. Nowadays, cultivators say a poor hemp harvest is more valuable than a healthy tobacco crop due to the high demand for CBD. Not only is hemp oil in demand for medicinal and recreational purposes, but it’s also extremely useful in the manufacturing of products such as cars, construction goods, textiles, and even furniture.
While the expansion in US hemp growers is expected to continue, investors nowadays are interested in Canadian-based growers. Since Canada has legalized marijuana for recreational and medical uses, Canadian farmers have an easier time growing a more diverse crop.
Under current federal law, American farmers cannot grow high-THC marijuana. Plus, many US states still have restrictions on the sale of CBD oil. Until these laws change, American farmers will be at a disadvantage to Canadian companies that can already cultivate both hemp and marijuana products legally.
Before investing in hemp growers, take a long look at the company’s balance sheet and the types of distributors they do business with. Is your business well-established with big financial backers, or is it just starting out in the hemp industry? What distributors do these hemp growers work with? Answering these basic questions will help you get a better sense of just how risky your investment is.
A few of the hottest publicly-traded Canadian growers include Cronos Group, OrganiGram Holdings, Aurora, and Canopy Growth.
Besides its many industrial uses, hemp oil has gained notoriety for the many purported benefits of cannabidiol (CBD). CBD is a special cannabinoid that’s found in extremely high quantities in hemp. Unlike tetrahydrocannabinol (THC) in marijuana, CBD is a non-psychoactive compound that many scientists believe could be used as a cure for many conditions.
The safest bet in the medical CBD space is for epilepsy research and development. Numerous studies now confirm CBD-based drugs can help epileptic patients reduce the severity and frequency of seizures. Indeed, the FDA recently approved a CBD-derived drug (Epidiolex) for people with epilepsy.
Other conditions CBD might be beneficial for include anxiety, depression, insomnia, and chronic pain. Most of the evidence for CBD’s effectiveness in these areas, however, is anecdotal.
While CBD can be used effectively on its own, many researchers are interested in how to use CBD with other cannabinoids to produce a targeted therapeutic program. Interestingly, a few scientists now believe CBD works synergistically with compounds like THC to produce greater medicinal benefits.
For this reason, many Canadian biotechs are now favored on Wall Street. With Canada’s more lenient policy on medical marijuana, researchers have an easier time growing and investigating all of the cannabinoids present in marijuana.
A few of the biggest names in the medical CBD oil field include Charlotte’s Web and GW Pharmaceuticals.
For those who want to get involved in the hemp industry indirectly, consider looking into companies that provide supportive services to growers and distributors. These service provider companies supply hemp companies with things like soil, hydrotropic devices, packaging, or lighting equipment. Since ancillary hemp companies are “behind the scenes,” they usually aren’t as volatile as stocks directly involved in the hemp industry.
Another way ancillary hemp companies are less risky is that they are more diversified than hemp companies. Most often these service providers only devote one segment of their business specifically to hemp. This diversification allows you to profit from the global hemp industry without being exposed to its risks.
Of course, just as the falls aren’t generally as bad for ancillary stocks, you shouldn’t expect these stocks to go as high as successful hemp growers or biotechs. Ancillary stocks are best for people who are very risk-averse.
Just because ancillary stocks aren’t as risky as direct hemp plays, however, doesn’t mean they aren’t without risk. As the hemp oil industry evolves, it’s going to take time for markets to set standards for the industry. Just like with hemp growers, review the ancillary companies you’re interested in thoroughly before investing.
One of the classic names in the ancillary hemp space is Scotts Miracle-Gro, which now deals directly with hemp and marijuana growers through its Hawthorne Gardening division. Another way to play the ancillary CBD space is to take a look at a name like KushCo Holdings, which supplies hemp companies with FDA-approved packaging.
Like any other investment, you must carefully consider your risk tolerance when picking a hemp stock to get involved in. Although the demand for hemp has never been greater, analysts are still struggling to find the right price-to-earnings ratio for these new businesses. This means some companies might be overvalued at current levels. Since hemp and CBD are so new, it will take time for financial experts to form a more realistic view of earnings and growth potential. No matter what hemp company you invest in, remember that this is a new (and therefore risky) business.
If you believe in the future of hemp but don’t want to pick specific stocks, then you might want to look in a cannabis index or an exchange-traded fund (ETF). With an ETF, you won’t have to worry about the dramatic spikes and falls of owning individual hemp companies. There are now a few ETFs on the global stock exchange that include major players in both the hemp and marijuana space. Watching these ETFs is also a good way to gauge Wall Street’s current valuation of the hemp and marijuana industry as a whole.
The ETFMG Alternative Harvest ETF was the first publicly traded ETF that focused on cannabis companies in Canada. There are also a few indices that focus on hemp or hemp-related names such as the Global Cannabis Stock Index (GCSI) and the New Horizons Junior Marijuana Growers Index ETF. For those who believe in the future of hemp but don’t have the time to research the specifics of different companies, ETFs or indices might be the best option.
Hemp has swiftly become one of the most valuable commodities on the stock market. Although many hemp-related stocks have soared to record highs, this industry is still in its infancy. Competition between growers, biotechs, and ancillary providers is fierce, so you need to take your time exploring all of the companies, indices, and ETFs available in this space. Be sure to discuss your financial goals and time horizon before investing in any of the companies or ETFs listed above. Taking the time to research all of your options thoroughly will increase your odds of making some green off of the hemp industry.