Your 2018 Guide to Investing in Marijuana Stocks

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It's no exaggeration: 2018 should be the biggest year ever for marijuana stocks.

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Why? Start with Canada's expected legalization of recreational marijuana later this year. Of course, there's also the new legal recreational marijuana market in California. A handful of biotechs focused on cannabinoid drugs also have important milestones in 2018.

The North American Marijuana Index, which tracks 39 leading marijuana stocks, gained over 90% in 2017. I think an even better performance is in store this year. How can you potentially profit? Here's your 2018 guide to investing in marijuana stocks.

Marijuana growers

If you're looking for a pure-play way to invest in marijuana stocks in 2018, look no further than stocks of marijuana growers. And you might as well face north to do your looking, because the biggest and best opportunities are all in Canada.

Several Canadian medical marijuana growers generated fantastic stock returns last year. There were three primary reasons behind this success: a booming medical marijuana market in Canada and other countries, anticipation of legalization of recreational marijuana in Canada, and serious deal-making. I expect all three factors to continue to drive Canadian marijuana grower stocks higher in 2018.

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One approach to investing in marijuana grower stocks is to buy stocks of companies in the best position to capture significant market share of the Canadian recreational marijuana market. This market is projected to be between $4.2 billion and $8.7 billion annually, although at least one analyst expects a much bigger market size.

A top stock that should enjoy a large market share is Canopy Growth (NASDAQOTH: TWMJF). Canopy already ranks as the biggest marijuana stock by market cap. The company is also currently the largest provider of medical marijuana in Canada. In addition, Canopy received a huge vote of confidence in October with Fortune 500 alcoholic beverage company Constellation Brands (NYSE: STZ) buying a 9.9% stake for $245 million.

Another way to invest in marijuana grower stocks is to find companies that could be likely to be acquired by larger players. This is a tougher path to take, though, because there's no guarantee that a buyout will materialize.

Something of a hybrid option between theses two approaches is to invest in a stock that could gain a much-higher market share by making an acquisition. Aurora Cannabis is the most obvious pick with this strategy. The company is in the middle of a hostile takeover attempt of CanniMed Therapeutics. If the deal goes through, Aurora would have significantly greater production capacity and should be in better position to grab a larger chunk of the recreational marijuana market in Canada.

Biotechs

Marijuana growers aren't the only way to invest in marijuana stocks. Several biotechs are focused on developing and marketing cannabinoid drugs. Don't just throw your money at any marijuana biotech, though. Identify ones that have clear catalysts in 2018 that should propel the stocks higher.

GW Pharmaceuticals (NASDAQ: GWPH) certainly fits the bill. The biotech expects an approval decision by the U.S. Food and Drug Administration for cannabinoid drug Epidiolex in treating Lennox-Gastaut syndrome (LGS) and Dravet syndrome by June 27, 2018. GW also recently completed its submission of Epidiolex for the same two indications for European approval, with a decision expected in the first quarter of 2019.

Although approval in the U.S. or in Europe isn't a sure thing, the prospects for Epidiolex appear to be pretty good. GW Pharmaceuticals conducted extensive clinical studies on the drug in treating LGS and Dravet syndrome. Those studies showed solid efficacy and a safety profile that shouldn't derail approval.

Another marijuana biotech stock that I think could be a big winner this year is Insys Therapeutics (NASDAQ: INSY). Most of 2017 was rough for Insys, with sales tanking for its opioid painkiller Subsys and and a U.S. Department of Justice investigation into marketing practices for the drug.

However, I predicted in October that Insys could be the biggest comeback story of 2018. My timing was a little off: The comeback was already in full swing by December. Over the past month, Insys stock has skyrocketed by more than 150%. Can it keep going? I think so. Insys expects Subsys sales to stabilize and perhaps even grow with the drug now included on several formularies of top payers. Sales for cannabinoid drug Syndros, launched in August, should also increase this year.

Peripheral options

You can also invest in the marijuana industry in a less direct way. Several publicly traded companies provide products and services to marijuana growers and should be poised to benefit from the industry's expansion.

Perhaps the best stock in this category is Scotts Miracle-Gro (NYSE: SMG). Scotts sells fertilizers, hydroponics, and lighting systems that are essential for growing and cultivating marijuana plants. Over the past few years, the company has made multiple acquisitions to beef up its presence in the cannabis industry, including buying American Agritech, LLC, an Arizona-based leading producer of plant nutrients, plant supplements, and growing systems used for hydroponic gardening, and Gavita, a Dutch marketer of indoor lighting used in the greenhouse and hydroponic markets.

A more speculative pick is Glance Technologies. The small company markets mobile payment technology systems. In May 2017, Glance licensed its technology to Cannapay Financial to provide fintech solutions to marijuana suppliers and customers. In addition, Glance bought a large stake in Cannapay.

Constellation Brands is yet another potential way to invest in the marijuana industry without buying a pure-play marijuana stock. Thanks to its 9.9% ownership of Canopy Growth, Constellation stands to gain from legalization of recreational marijuana in Canada. The company also plans to launch a cannabis-infused beer down the road in partnership with Canopy.

The operative word

Above all, remember that the most important thing about investing in marijuana stocks is to... invest. What I mean is that the principles used in investing in any kind of stock apply to marijuana stocks, whether they're marijuana growers, biotechs, or peripheral providers.

Forget the hype about marijuana stocks. Make sure you understand the risks involved. Research the realistic growth prospects for each company. For stocks like Scotts Miracle-Gro, Constellation Brands, and Glance, dig into the rest of their business that's unrelated to the marijuana industry. Only after you've done all that (and assuming you're comfortable with the risk-reward proposition for the stock or stocks you're considering) should you actually invest.

Having said all of that, I suspect that plenty of investors will make plenty of money from marijuana stocks this year. Will 2018 really be the biggest year ever for marijuana stocks? We're about to find out.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.