Leonardo DiCaprio, playing penny stock hustler Jordan Belfort in the 2013 movie The Wolf of Wall Street, summed up the risks facing gullible investors:

“After all, it was the nature of twentieth-century capitalism that everyone should scam everyone, and he who scammed the most ultimately won the game. On that basis, I was the undefeated world champ.”

Stock picking is particularly treacherous in the cannabis industry. Marijuana poses huge investment opportunities, but you need to be careful. Financial wolves stalk the world of weed.

The marijuana industry is pervaded by dubious penny stocks with weak balance sheets. They’re burning through their limited cash, and they’re destined for bankruptcy. The cash flow problems of these small fry are exacerbated by the industry’s chronic difficulty in accessing mainstream financial services. Federal legislation to remove banking impediments for marijuana companies has stalled in the eternally feuding Congress.

Corporate marketing in the marijuana industry often lapses from hyperbole into outright fraud. Many marijuana penny stocks are aggressively promoted, even though they have lousy fundamentals, because they’re pump-and-dump schemes. After the insiders cash out, the sheep get slaughtered.

When researching a stock in any industry, I dig deep into earnings estimates…to look under the hood, so to speak…to gauge the true source of earnings growth. The volatile marijuana industry requires extra effort.

Let’s review the key criteria I apply when evaluating a potential pot investment.

For starters, I emphasize the time-proven yardstick EBITDA. That intimidating-sounding acronym stands for earnings before interest, taxes, depreciation, and amortization. EBITDA is a reliable marker for the cash earnings that a company can generate.

EBITDA removes the noise of tax rates, interest payments, and non-cash charges. EBITDA isn’t perfect, but it’s a better metric than growth created by one-time windfalls (say, from a tax cut). It helps separate the true profit catalysts from the smoke-and-mirrors.

Other factors I look for include sufficient cash flow to service debt; professional and experienced management (many marijuana companies are run by amateurs); product diversity; specialization (be wary of a company whose offerings are easily commoditized); and a ticker symbol traded on a major exchange. Vertical integration (“seed-to-sale”) is another plus.

I also prefer a healthy market cap. Small is fine, but my Spidey-sense starts to tingle when facing micro-caps.

If you make the right choices in the marijuana industry, you can reap exponential gains. After a disappointing 2023, pot stocks as a whole have bounced back in 2024. This momentum is poised to continue into 2025.

According to data from Research and Markets, the global cannabis market was worth an estimated $27.7 billion in 2022 and it’s on track to reach a market value of $82.3 billion in 2027, for a compound annual growth rate (CAGR) during this time frame of 24.3% (see chart).

Legalization on the federal level has taken a back seat in our divided government, but at the state level, legal marijuana is more popular than ever. One factor cementing marijuana’s importance with state leaders is the enormous and growing tax revenue from weed.

According to marijuana research firm New Frontier Data, if full legalization existed in all 50 states today, we’d see the creation of more than one million new jobs by 2025.

The anti-pot crusaders are stubborn and they’re trying to roll back legalization at the federal and state levels, but it’s my contention that their efforts are doomed to fail. Many “canna-billions” are at stake. If you keep a wary eye on the predators, you can grab your share of the spoils.

Editor’s Note: Marijuana equities have been surging so far in 2024. You can reap enormous investment gains in the fast-growing, global marijuana industry. However, when picking a pot stock, you need to be especially careful.

I’m the editorial director of Investing Daily. I’m also the chief investment strategist of our premium trading service Marijuana Profit Alert.

For Marijuana Profit Alert, I’ve put together a portfolio of the best-of-breed marijuana equities.

These holdings are poised to soar during this political season, as a slew of states consider November ballot initiatives to legalize weed. Among the bitterly divided electorate, at least one issue has generated a favorable consensus: the legalization of weed.

Want to learn about my money-making marijuana trades? Click here.

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This article previously appeared on Investing Daily.