North American cannabis stocks have been a pretty decent hiding place for investors over the last year. But there’s a lot more action to come in the months and years ahead. According to the folks at Horizon’s ETF, the 2016 legal marijuana market size was an estimated $7.06 billion.
Between then and 2025, that growth in the US is expected to compound at a staggering rate of 24.9% compounded annually! And that’s just the US. Canada, one of the global leaders in legalized and recreational cannabis, is expected to grow into a $6.5 billion opportunity for investors by 2020.
ETFMG Alternative Harvest ETF (MJ) tracks a basket of marijuana/cannabis/pot stocks and can be used as a typical representation of how the industry has generally fared.
Over the past 1-year, the benchmark-setting MJ has delivered 11.27% in Net Asset Value (NAV) appreciation to its investors. Pretty good, huh? Well, what is there is a way – going forward – to do even better. Much better?
The Play Explained
To get those better than the index returns, you need to consider looking at multi-dimensional investments – in this case, dimensions which include cannabis plus…!
While buying a whole basket of stocks that have cannabis exposure might be a great passive play, if you do some research, you can find “multiplay” stocks that promise more than just average returns in the coming months. The idea behind multi-play is to add stocks that play in the cannabis space, but that also have exposure – either directly or indirectly – to other sectors as well. That way, if the cannabis side of the business falters, the other parts of the play will hopefully work.
Here are four multi-play cannabis stocks that you should consider adding to your portfolio for the second half of the year.
Zynerba Pharmaceuticals (ZYNE)
ZYNE is a double play – in the health care sector as well as the cannabis space.
Based out of Pennsylvania, this specialty pharma company was established in 2007 and focused on developing “pharmaceutically-produced transdermal cannabinoid therapies” for a range of rare and not-so-common neuropsychiatric disorders.
Although this is not a company that grows or sells cannabis, it is in the front-line in using the product for producing medical treatments. As such, it is a play on the broader pot sector.
As a health care play, the increasing tendency of physicians to consider prescribing alternative drugs – such as ZYNE’s under development transdermal cannabidiol gel Zygel – is definitely a positive for the company. Some of ZYNE’s drugs are in Phase II and Phase III clinical trials, and could provide a breakthrough in treating children and adolescent patients with rare conditions like fragile X syndrome disorder and autism.
Innovative Industrial Properties, Inc. (IIPR)
IIPR is what I’ll call a double play!
This Maryland-based company acquires, owns and manages a specialized industrial real estate that is then leased to state-approved (licensed) entities to run their regulated medical cannabis operations. For tax purposes, the company is currently treated as a Real Estate Investment Trust (REIT). So, the play here is both as a REIT as well as a cannabis play.
Why do its REIT characteristics matter? Well, it’s a matter of investor perception – but also based on fact. Higher interest rates tend to depress the present value of future cash flows from REITS, and that drives down the value of REIT stocks. But declining interest rates have the opposite effect. And guess what? All indications are that interest rates are heading for a haircut shortly!
Once again, when (and not IF!) that happens, your investment in IIPR today is likely to experience a decent price appreciation!
Shopify Inc. (SHOP)
Shopify Inc. provides a cloud-based multi-channel commerce platform for small and medium-sized businesses in the United States, the United Kingdom, Canada, Australia, and internationally.
SHOP is a unique triple-play idea – part tech, part retail and part pot!
The company offers a cloud-based platform for Small and Medium Enterprises (SMEs) in the retail sector to establish virtual footprints for selling their products and services. It has an international reach, including in the USA, UK, Australia, Canada and other parts of the globe. As such, it is truly a global play as well!
Recently, the company moved into the cannabis space by opening up its platform to Canadian pot retailers to set up shop. Since Canada has legalized cannabis, this move is seen as a first step to evaluating how things go. Investors can then expect similar moves into other jurisdictions – especially in the US, where pot is legal. When (not IF!) that happens, investors can expect a massive pop in the stock’s price.
The Scotts Miracle-Gro Company (SMG)
Anyone that owns a lawn or has a passion for gardening probably knows SMG. But this Marysville, Ohio-based marketer of consumer lawn and gardening products has a unique “other dimension” to it as well. And that’s the dimension that makes it a candidate for our “double play” list.
The company has been around since 1868 and is a natural play for anyone looking to add some consumer/agri-business action to their portfolio. But over the past several years, the company has developed a strong viewpoint on cannabis and, as a result, has made a series of acquisitions that will propel it to rake in a significant portion of its future revenue from marijuana. It hopes to do that by supporting cannabis growers with Agri-based products and supplies, including pest-control, fertilizers and a variety of soils and plant foods.
While MJ may have delivered spectacular low-double-digit performance to its investors over the past year, our multi-play picks (above) out-scored MJ by more than a country mile in that period.
Obviously, past performance isn’t any indication of what the future holds. However, given that each of these names is “hedged” to more than one sector of the economy, they stand a reasonable chance of delivering consistent returns during the rest of the year.
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The author does not own any of the stocks discussed in this article.