2018 can rightly be called the year that made investors sit up and take note of Crypto currencies and marijuana/cannabis. Stocks in both those sectors saw wild gyrations in valuation and volumes. But while Bitcoin and its peers have sunk lower, marijuana stocks have performed relatively well. Some might even say they have shown a spark of recovery over the past few weeks.
So, the big question for investors now is: Is it worth taking a shot at marijuana/cannabis?
According to one global researcher’s estimate, the world-wide marijuana industry is likely to grow to US $146.4B by 2025. The same report expects the US market, estimated at roughly US $7.06B in 2016, to experience a CAGR of 24.9% within the next six years. Across the border in Canada, where cannabis is now legal across the land, Bloomberg reports that cannabis sales could total CAD $6.5B by next year (2020).
Let’s put that in perspective.
According to Global EDGE statistics, many U.S. industries, like Coffee, Cocoa, Tobacco and the Arms dealers, despite being around for multiple decades, haven’t yet cracked the $7B ceiling. If the $146.4B estimate by 2025 is remotely accurate (and there’s no reason to doubt those figures), then investments in marijuana stocks now could be worth a shot!
So, if you buy into the thesis, what would be the best moves to play it? Well, as with investments in any sector, you need to evaluate the best of breed players in the industry, and then put your money to work there.
Here are our top picks:
Scotts Miracle-Gro (SMG)
Scotts Miracle-Gro, I hear you sigh! But, aren’t they the guys that sell grass seeds, fertilizer and lawn care products? Well, they do all that for sure, but they also have a subsidiary – Hawthorne Gardening Company – that is focused on research and development for products, technologies and expertise related to the Cannabis/Marijuana sector. Hawthorne has already established itself as an industry leader in the hydroponics sub-sector in regions of the U.S. – like California – where marijuana is legal.
But SMG also has its eyes across the border in Canada, where it hopes to capitalize on the October 2018 legalization of cannabis. It is doing so through a strategic partnership. Although the initial focus of the joint-venture with a Canadian cannabis leader, The Flowr Corporation, is in its initial stages, the venture hopes to go operational this year (2019).
Over the past 5 years, SMG has yielded portfolios nearly 20% return on its stock price. The stock traded at $59.18 in early 2014, and closed (intra-day) at $68.74. It’s true that, over the shorter-term (1 and 2 years) the company hasn’t been a great performer, losing nearly 36% and 24% of its value respectively. However, there has been a nice recovery (almost 12%) since earlier this year.
Through SMG, investors can add great diversification to any portfolio. If the whole marijuana/cannabis “thing” doesn’t work out, they’ve still got the core lawn-care business to fall back on. And if, as is widely anticipated, cannabis is legalized in other U.S. jurisdictions, like New York, New Jersey and Illinoi, then SMS could emerge as a true market leader in the sector.
Canopy Growth (CGC)
Another cannabis success story that’s likely to give portfolios a high (no pun intended!) in the coming years is Canadian producer Canopy Growth (traded on the NYSE). On October 15th, 2018 CGC closed at US $56.89. Just a few weeks later it was hit by the general market malaise and dropped to US $26.22 on Dec 21, 2018 – a down-swing of nearly 54%!
Today, the stock trades at US $48.48 (intra-day), which marks an 85% recovery from its Dec 2018 lows. At this price, it is just 15% shy of its Oct 2018 highs. If we look at CGCs ascent over a 2-year period, we’ll see that it has done spectacularly, giving portfolios that held it over the time an incredible 87% return on investment.
But there’s more than just the “Canadian connection” that makes CGC an interesting pick. In August 2018, CGC received a ringing endorsement from Constellation Brands, Inc. (STZ), the maker of Corona and Modelo beer, with a U.S. $4B investment. That put STZs stake in CGS to roughly 38% of the company.
The owners and management at STZ are shrewd operators and skillful allocators of capital. There’s no doubt that they see great potential for their $4B to grow with CGS. And when (not IF!) the legal cannabis/marijuana market expands in the U.S., they’re bound to reap the benefits of their cross-border investment. As a retail investor, I would take my cue from STZ and buy a small stake in CGS now.
Risks and Opportunities
Before you go out and load your portfolio with these picks, you need to understand that, like the crypto scene, the cannabis/marijuana sector isn’t immune to risks. And only once you are comfortable with those risks should you consider adding these names (and others like them) to your portfolio.
The supreme amongst all risks with marijuana is that it is still not legal at the federal level in the U.S. Though individual states have passed legislation legalizing its possession and consumption, what the Federal government does on that file could mean the difference between gain and loss for your portfolio.
And then, there’s the risk of financing the industry. Since major banks and investment houses are wary about stepping on the Fed’s toes, they are (by and large) staying away from directly investing in cannabis. Sure, we’re seeing innovative ways to get around Fed regulations, such as STZ’s and SMG’s Canadian (rather than U.S.) investments, but that might not be enough to fill the void, pushing the broader industry into cash starvation.
But there’s good news too. As indicated by the graphic above, a vast number of states have already legalized recreational or medical use of marijuana. Several others are likely to follow suit – including New York – which could unleash a tsunami of legalizations. When that happens, current leaders like STZ and SMG will benefit greatly.
Over the past month or so, both companies have shown remarkable recovery from their 2018 lows. Hopefully, that trend will continue in the coming months.
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Author does not have investment in stock discussed in this article.