It’s high time to talk about medical marijuana stocks.
What was one of the hottest stock sectors in 2015, 2018, and 2019 is potentially making a rebound in 2020.
As I’ve told you time and time again — patterns repeat themselves. This is true in just about every facet of life, but I’m specifically talking about stock chart patterns and trending sectors.
As more and more locales legalize weed, there’s a much greater interest in the herb and all that it can do. And guess what? It can do more than get you high.
Medical uses for marijuana are extremely hot. It’s said to be effective in helping to treat all sorts of diseases, from multiple sclerosis to glaucoma to cancer and even Alzheimer’s.
There are a TON of companies gaining traction in the market, and a ton of interest in the growing potential for medicinal products and uses.
As with previous periods of the sector heating up, it’s important to remember that this is still an emerging sector. It’s still kind of like the wild west, so it’s vital to do everything you can to stay safe in this still-risky sector.
But the volatility and high public interest can also create amazing opportunities.
So as a trader, how can you intelligently approach this trending sector as it is right now? What stocks should you be looking at? What should you expect from medical marijuana stocks in the year ahead?
In this post, I’ll dig into what’s happening right now with medical marijuana stocks, including how to locate stocks to trade and what I’m looking forward to in this sector in 2020.
Table of Contents
- 1 What Are Medical Marijuana Stocks?
- 2 Medical Versus Recreational Marijuana
- 3 The Rise of Medical Marijuana Stocks
- 4 How I’d Trade Medical Marijuana Stocks in 2020
- 5 Marijuana Industry ETF
- 6 Key Tips to Trade Medical Marijuana Stocks
- 7 Marijuana Medical Stocks to Watch in 2020
- 8 Enroll in the Trading Challenge
- 9 Conclusion: Ready to Start Trading Medical Marijuana Stocks?
What Are Medical Marijuana Stocks?
There’s a lot of misunderstanding about medical marijuana stocks, so let’s clear the air. What are these types of marijuana stocks and how can you find them?
To understand medical marijuana stocks, you need to understand what medical marijuana is first.
Medical marijuana is marijuana that’s specifically used to treat medical conditions or diseases.
Marijuana is made up of a slew of different chemicals. And there are two key chemicals that are used medicinally: THC (short for delta-9-tetrahydrocannabinol) and CBD (short for cannabidiol).
Harold and Kumar fans will recognize THC as the component that induces the high feeling that pot is so famous for.
CBD, on the other hand, is becoming more popular. It has the same medicinal qualities but lacks the psychoactive effects.
Believe it or not, marijuana wasn’t invented in San Francisco in the 60s. It’s been around for centuries. From the 1850s to the 1940s, it was even listed in the U.S. Pharmacopeia (also called the USP) as an acceptable medical product.
Marijuana was regularly prescribed for illnesses ranging from gout to migraines to … yep, even intestinal worms in the 1800s and early 1900s.
But in the 1930s there was a big campaign to make medical cannabis illegal. Mission accomplished. Cannabis wasn’t a huge part of the public eye — until hippies discovered it as the ultimate party starter.
That’s been changing in recent years … the benefits of medical marijuana are newly re-discovered and touted for helping to alleviate symptoms from cancer, glaucoma, and more.
Medical Versus Recreational Marijuana
Nope: not all marijuana use involves queuing up “Bill & Ted’s Excellent Adventure” and breaking out the junk food.
So how is medical marijuana different than recreational marijuana? Let’s count the ways:
- You need a doctor’s note. To get medical marijuana, you need a recommendation from a doctor. With this recommendation — which needs to be renewed periodically — you can go to an approved dispensary and purchase products.
- The product could be different. Sometimes, medical marijuana has less THC than recreational marijuana, since the goal isn’t necessarily to get high. Often, it has a higher level of CBD than recreational marijuana.
- Medical marijuana is available in more places. Recreational marijuana is approved and legalized in 11 U.S. states (plus Washington D.C.). But at this point, it’s still less common than medical marijuana, which is available in 33 states (up from 23 at this time last year).
Types of Medical Marijuana Stocks
So, now that you understand medical marijuana a little better, what are medical marijuana stocks?
These stocks are related to the medical marijuana industry, and might include:
- Marijuana growers: This is one of the most straightforward types of marijuana stocks, offered by growing operations.
- Marijuana distributors: These are the companies responsible for transporting the product from growers to warehousing and dispensaries.
- Marijuana dispensaries: Sometimes growers also offer products at a retail level, but sometimes they sell wholesale to dispensaries. This is where people go to purchase medical marijuana. These establishments might offer stock.
- Medical stocks: Pharma companies are getting hip to the medical marijuana trend. These stocks would be offered by companies developing drugs with CBD or medical marijuana.
- Related products: To grow marijuana, you need supplies. This means you can consider companies offering hydroponic products, fertilizer, and lighting systems part of the medical marijuana industry.
The Rise of Medical Marijuana Stocks
Yep: medical marijuana stocks are on the rise. There are a few pretty compelling reasons, such as…
Trends Influencing Marijuana Stocks
Increased Interest in Holistic Healing
Recent years have seen a huge increased interest in holistic medical alternatives. Medical marijuana is a big part of this.
People are increasingly digging the potential healing properties of cannabis, and there’s room for medical marijuana to branch out. Medications are in the works. There aren’t a ton of studies showing the long-term results of medical marijuana … but that’s because it takes time.
At the time of this writing, two medications containing cannabinoid chemicals are currently FDA-approved … But that’s major and could lead to additional approved drugs.
As more researchers conduct more studies, medical marijuana will likely be on the rise.
More and More Legalization
Colorado and Washington led the legalization charge in the U.S. Several states have followed. And in 2018, Canada completely legalized marijuana. Again, several states followed.
Following each wave of legalization, pot stocks enjoyed a huge surge in popularity. As more states legalize recreational or medical marijuana or both, more companies will start-up to create supply for all that demand.
2019’s Farm Bill
Last year, the approved Farm Bill helped legalize the production of industrial hemp, a common source of CBD.
Prior to this, CBD lived in kind of a legal grey area. It wasn’t illegal, but it wasn’t exactly legal either. It was mainly available on a smaller scale. You wouldn’t see it in CVS, for instance.
Now that the bill’s been passed, you see CBD everywhere — from pet stores to airport gift shops to yoga studios. It’s a whole new market.
How I’d Trade Medical Marijuana Stocks in 2020
So, by now you probably realize that this sector is worth watching. But there’s a lot more you need to know before you start trading.
Are Medical Marijuana Stocks Easy to Trade?
How do you buy cannabis stocks? It’s not always as simple as making a selection and executing a market order…
You need a more than strong will and desire to really make intelligent trades. Here’s what you need…
#1 Stock Screener
Hands down, the best way to find potential medical marijuana stocks is by using a stock screener.
A stock screener is a platform where you can filter stocks by criteria that you set up. It’s the first step in creating a strong watchlist, which should be the basis of all of your trades. My favorite is StocksToTrade. It has the best tools and allows you to execute trades right from the platform.
For example, you might start by filtering on the top gainers for the day, then filter by volume and float.
Within that list, especially these days, you’ll probably see a few medical marijuana stocks.
You can use various methods to filter down from there. (Here’s how to make the most of a stock screener).
#2 News Catalysts
What’s a new catalyst? Any news related to a company or sector that could affect stock prices. Here are some common catalysts…
Soon after the end of each quarter, public companies release a quarterly earnings report. They have a limited time period in which they need to release them. That’s called earnings season.
A lot can happen to a stock’s price based on the earnings reports. If the company performs higher than anticipated, it can (but won’t always!) drive up the stock price. Sometimes it’s short lived. Sometimes it lasts longer.
But if the company doesn’t meet earnings expectations, it can have the opposite effect and bring the security price down. By staying on top of the release dates you can find potential opportunities.
This is particularly relevant to medical marijuana stocks right now. It seems everyone wants to get in on the action…
For example, say that hypothetically, as legalization continues to become more widespread, a major pain reliever company partners up with a growing operation to create a cannabis-laced aspirin.
This could create some massive price movement. And not just for the companies in question but for the entire sector. Bottom line: stay on top of the news!
Notable New Hires
A change in personnel can affect a company’s stock price. If a beloved and high-performing CEO steps down, the uncertainty of what will happen next could bring the stock price down.
On the other hand, look at a company that has poor earnings. If they decide to sack the CFO and find a hotshot replacement, that could have a positive effect on the stock price.
With medical marijuana stocks, there’s a lot of personnel movement as many of these companies are still figuring things out and going through growing pains.
Sometimes, policy or regulation changes can affect the stock price. Medical marijuana stocks are a great example right now.
Policy keeps evolving and legalization continues to unfold. Stocks could experience some big movements as a result of these ongoing events.
#3 Chart Patterns and Indicators
The most effective stock research is usually a mix of fundamental analysis and technical analysis.
Fundamental analysis covers news catalysts, earnings reports, and an in-depth look at the company overall. Technical analysis is all about the charts. And as my Trading Challenge students know, I’m all about charts.
Even if a stock has amazing fundamentals, you gotta back it up with price action on the chart.
I like to look for clean, easily identifiable patterns in stocks. I don’t like surprises … So I try to find charts that follow what looks to be a reliable and easy-to-follow trajectory.
When a chart is clean, so is my mind as I enter a trade. While history never repeats itself exactly, it’s usually pretty close. Close enough — at least I hope — to help me profit.
Nobody can be right all of the time, but this method has helped me be right enough of the time.
My win rate (check it out on Profit.ly where I document every trade) is about 75%.**
Lately, some of my biggest plays have been with first green day runners and multi-day breakouts. Check out two of the biggest patterns I’m playing so far in 2020!
Want to learn more about my favorite stock chart patterns? Check out this post.
(**Please note: my results are not typical. I’ve spent years developing exceptional skills and knowledge. Always remember trading is risky. Never risk more than you can afford.)
#4 Volume and Volatility
Before you buy medical marijuana penny stocks — or any stocks, to be honest — you’ve got to understand volume and volatility.
This is particularly important for medical marijuana penny stocks. They can pack a double whammy when it comes to volatility.
Low-priced medical marijuana stocks are subject to the same volatility as most low-priced stocks. And they’re in an emerging sector that hasn’t proven itself yet. Regulations, red tape, and FDA hesitancy make it very risky.
Lots of volatility can mean the potential for profit — but it can also mean the potential for big losses.
This volatility is in part why it’s so important to look at the volume around a given stock. Good volume (at least one million shares daily as a starting point) can be a good indication that there are buyers and sellers actively trading this stock.
This means there’s good liquidity. It increases the likelihood of an easy entry and exit from a position if you choose to trade.
If there’s not enough volume, run away! It could mean you won’t be able to exit your position when you want. Nobody likes being stuck in a trade.
Marijuana Industry ETF
ETF is short for exchange-traded fund. An ETF includes several underlying stocks or other securities under one umbrella. You can buy shares of an ETF like a stock, but it actually represents several different assets.
There are several ETFs that focus on the marijuana industry these days. So if you’re not sure where to start with pot stocks, this could be a way to test out the waters. It’s one way to buy in with some built-in diversity.
Personally, this isn’t my approach. I prefer to be a step ahead of followers and do my own stock research. But every trader is different. And want you to know what’s happening in all the corners of the market.
Key Tips to Trade Medical Marijuana Stocks
Here are a few more things you need to do before you start trading medical marijuana stocks…
Establish Your Budget
So how much of your account are you willing to put on the line when trading medical marijuana stocks?
Part of improving as a trader is having a plan in place. Part of that plan is deciding your position size in advance.
So how big do you want to go? There’s no definitive answer here. It depends on multiple factors — the size of your account, your risk tolerance, and how solid you think the setup is.
My advice: Study hard before you put any of your account on the line. And when you do start, go small at first. You can always scale up in time — after you prove to yourself that your strategy works.
Research the Company
When considering marijuana companies to trade, you gotta do the research.
Medical marijuana stocks are hot now and offer the potential for great returns…
Then again, they don’t have a proven track record. They’re volatile, so losses could mount quickly.
How do you know if the stock you’ve chosen is a good pick? Research. LOTS of research.
Solid fundamental and technical analysis will help you out here. Get an idea of what the company is, what it does, the buzz around it, and its earnings.
A lot of these companies are growing fast. So read up on their financials and what people are saying about them.
Then, back it up by looking at the charts and checking out the action around the stocks. Remember: if it looks too good to be true, it probably is.
Understand the Risks of Investing in Medical Marijuana Stocks
There’s a lot of risk in trading medical marijuana stocks. Legal ambiguity, lack of clear regulations, and constantly changing laws — there’s a ton of uncertainty in the medical marijuana sector. These are some of the specific risks.
You can determine the valuation by comparing a stock’s price to the company’s earnings, as well as cash flow and overall revenue. Some marijuana stocks have increased in price so fast that it’s hard to get an accurate read on the growth potential for the stock.
Also, some newer companies aren’t profitable yet or are too new to really show historical data.
That means most people are looking at growth projections rather than the cold, hard facts of history.
It can be hard to determine if a price is appropriate — especially since no one really knows what the future legal forecast holds.
A Lot of These Companies Will Fail
Medical marijuana stocks are trending, and plenty of people are jumping on the bandwagon with weed-related startups.
Trouble is, with such a glut of supply, the demand will eventually decrease. And some companies are bound to fail. And if you’re holding stock in one of the failing companies, you could lose big (unless you’re short selling).
As the medical marijuana sector heats up, lots of companies are eyeing expansion.
But if they don’t have enough capital, they may issue additional shares to build up capital. The value of the existing shares will drop. Now there’s a higher number of outstanding shares.
Dilution is a real risk for marijuana stocks because the legal grey area prevents some companies from borrowing from banks. And they might resort to creative ways to raise cash.
Risk of Commoditization
Marijuana is grown, which classifies it as agricultural. Here’s the thing: Agricultural items are considered commodities.
Commodities are a classification of securities that includes raw materials and items ranging from metals, like gold, to resources, like oil. Basically, they’re items that are inherently the same between different companies, with the price being the only real point of difference.
Commoditization can lower the price point because companies must adhere to industry standards to a certain degree to maintain even demand.
This isn’t a big problem right now, because the demand for medical marijuana is very high. But as legalization continues to sweep through the states and more producers get in on the action, that could change.
Marijuana Medical Stocks to Watch in 2020
Everyone wants the hot stock picks, right? Yawn.
I can’t even tell you how often people ask me, “Tim, what’s your hottest stock pick?”
This is the dumbest question. Even if I told you, you still might mess it up if you don’t have a solid strategy or act fast enough.
So yeah, I could tell you that a company like Aphria (APHA) has a seemingly promising future.
Or I could tell you that companies like GW Pharmaceuticals (GWPH) or Canopy Growth (CGC) are still getting a lot of attention, even though they’re definitely not penny stocks.
… or that people are still looking at Aurora Cannabis (ACB) even though it’s been losing lately.
Yeah, maybe these tips might be good enough to give you ideas for your watchlist.
But honestly? Tips won’t do you much good. To really have the most up-to-date stock picks, you’ve gotta scan every day and react to what the market puts out there and shows you.
Are you set up with StocksToTrade? Do you know what to look for in a breakout? Focus on your education. Learn these things.
New to penny stocks? Access my FREE penny stock guide here.
Enroll in the Trading Challenge
I could talk about medical marijuana stocks all day, offering tips, tricks, and insight…
But you won’t really make much of any of it without understanding how trading actually works.
In my Trading Challenge, my goal is pretty simple: I want to teach you how to think for yourself as a trader. I want you to formulate your own game plan when hot sectors like medical marijuana stocks pop up.
Before you can do that, you have to start with the basics. In the Challenge, I teach my students exactly that, from penny stocks to advanced charting techniques.
But it’s not just me and my top students making videos and webinars. I also trade alongside you with a small account. I use my trades as lessons to teach you how to trade more intelligently.
This allows me to tailor my teachings to what’s happening in the market, as it’s happening. I show you how I adapt to what’s happening in the market now. If you’re ready to learn the rules of trading, build a strong foundation for trading, and join a great community, consider joining my Trading Challenge.
Conclusion: Ready to Start Trading Medical Marijuana Stocks?
Medical marijuana is a sector that’s gotten hot in the past, and it’s likely to get hot again.
The legal landscape for marijuana and CBD in the U.S. is changing, and plenty of stocks are making big moves. The volatility in this market can be dangerous…
But it can also provide opportunities for traders who are willing to do the research. And it can work for traders who have the risk tolerance to handle this action-packed sector.
These stocks are kind of like the Wild West, so watch yourself. Make sure you’re not gambling or getting in over your head.
Ultimately, the same principles hold true for these stocks as for any other stocks. Bottom line: you need to do your homework. Be sure to make a watchlist, do your research, and always cut losses quickly.
Do you trade medical marijuana stocks? If so, do you have anything to add? Leave a comment!