Education - August 27, 2018
The Marijuana Industry: 5 Ways to Get High Returns
It’s why your hippie neighbor moved to Colorado. It made Richard “Cheech” Marin and Tommy Chong famous. And it just might be your portfolio’s next target industry — it’s marijuana.
Marijuana is no longer taboo. In fact, it’s quickly becoming the opposite.
Marijuana is legal for medical use in 30 U.S. states (plus D.C.) and legal for recreational use in nine states. While still illegal at the federal level, people have become more accepting of marijuana. In fact, 61% of Americans support medical and recreational legalization, according to Pew Research Center (2017). In October 2018, adult-use recreational marijuana will be federally legal in all of Canada.
Bob Dylan sang in 1964, “the times they are a-changin’.” Those words still ring true in 2018.
Given these changing times, the marijuana industry may now represent a major opportunity. Below, we detail five ways to gain exposure to the marijuana industry. (We mean financial exposure, of course.)
1. The Marijuana Pure Play
Marijuana growers and producers are often referred to as “pure plays.” These companies are as far up the value chain as you can get — they plant, grow, and harvest cannabis to produce dried flowers, resins, or extracts. Mainly operating in Canada and the U.S., their products are sold to medical and recreational buyers around the globe.
Canopy Growth Corporation (NYSE:CGC) (TSX:WEED) is the outright leader in the category. In August 2018, Constellation Brands (STZ) acquired 104.5 million shares in Canopy Growth for a record-breaking $4 billion. This was their second investment in the Ontario marijuana grower and raised their ownership stake to 38%.
The vote of confidence from Constellation Brands, makers of Corona, Modelo, and Svedka Vodka, further bolstered public interest in the marijuana industry.
Tilray Inc. (TLRY) is the first marijuana producer to IPO on a major U.S. exchange. The British Columbia-based company grows marijuana in Canada and Europe with distribution channels around the world. With an IPO date one day after Canada announced the official date of legalization (October 17, 2018), Tilray stock has embodied the volatility experienced by the entire industry since the start of 2018. On August 27, it was announced that Tilray had reached a deal with Nova Scotia Liquor Corporation, who will make an initial purchase before legalization in October — Tilray climbed more than 30% on the news.
Existing and new pharmaceutical and biotechnology companies are investing in cannabis-based research. Some of the companies in this category focus only on medications derived from cannabidiol (CBD) and tetrahydrocannabinol (THC), the active ingredients in marijuana. Others have only one or a couple drugs in the space, making them attractive options for those seeking exposure to the marijuana market with some degree of insulation.
AbbVie Inc (ABBV), a 2013 spinoff of Abbott Labs, is a research-based pharmaceutical manufacturer. AbbVie is the seller of Marinol, a synthetic THC drug that treats loss of appetite in AIDS patients as well as nausea in patients receiving chemotherapy. AbbVie is an S&P 500 component and, since Marinol is neither their flagship nor top-selling drug, provides a great opportunity for diversified exposure to the marijuana industry.
GW Pharmaceuticals (GWPH), a U.K.-based biopharmaceutical company, focuses exclusively on cannabis-derived drugs. GW developed the world’s first prescription medication derived from the cannabis plant — Sativex, a treatment for spasticity resulting from multiple sclerosis, has been approved in numerous countries but not the United States. GW’s second drug to complete clinical testing is Epidiolex. In June 2018, Epidiolex became the first cannabis-derived drug to receive FDA approval, treating certain rare types of seizures, and was awarded orphan drug status.
3. Marijuana Ancillary Businesses
There are numerous inputs, other than just cannabis seeds, required to create the final product sold in medical and recreational dispensaries. Whether it be fertilizers, hydroponic equipment, or packaging, more than a few companies are included in the marijuana industry’s value chain without directly facing the regulatory hurdles that growers do.
Scotts Miracle Gro (SMG) has the most brand recognition of any player in this category. Scotts’ hydroponics unit, Hawthorne Gardening, has wowed investors in the past. Through Hawthorne, Scotts acquired Sunlight Supply for $450 million in April of 2018. With this acquisition in mind, Scotts’ organic growth has been less than analysts hoped, as of late; a drawn-out winter has limited consumer product sales, and Hawthorne’s hydroponics growth is slowing as fewer states than expected have eased marijuana restrictions.
Kush Bottles Inc (KSHB) operates a simple but well-positioned service to growers and sellers — packaging. Kush Bottles offers white-label and custom packaging for marijuana flowers, resins, and oils. Its value proposition is helped by regulation in the U.S. and Canada, which hold packaging and labeling to varying standards depending on the state or province.
Solis Tek Inc (SLTK) has a similarly valuable seat at the marijuana industry table. Solis Tek manufactures and services digital lighting equipment. Since nearly every grower has moved growing operations indoors, lighting and technology like that sold by Solis Tek is a necessity.
Other Major Players: GrowGeneration Corp (GRWG)
4. Marijuana Business Services
Even with just laws and regulations alone, there are significant barriers to entry in the marijuana industry. Add to those the fact that the marijuana industry is a young one — there are many eager to get involved, but best practices and industry standards are still being formed, and thus there’s a market for consulting and other business services.
MariMed Inc (MRMD) is a Massachusetts-based cannabis consulting firm. In addition to consulting new ventures on securing dispensary licenses, cultivation permits, and community support, MariMed provides turnkey solutions to cannabis cultivators and dispensaries by addressing business functions like location selection, infrastructure and organizational design, and merchandising and sales. MariMed’s market cap is only $566 million, but that figure has more than doubled since the end of 2017.
Innovative Industrial Properties Inc (IIPR) is the only public REIT focused on the marijuana industry. The company addresses one of the major roadblocks growers and producers have faced since day one: marijuana is still federally illegal. As such, it’s incredibly difficult to secure funding from banks or lenders to secure land and facilities — enter the cannabis REIT.
After trading below its $20 IPO price for more than a year, IIPR has grown tremendously in 2018. Aside from the blue chips (AbbVie, Scotts Miracle Gro, etc.) that have diversified into marijuana, IIPR is the only stock in the marijuana industry to pay dividends, and it has done so every quarter since Q2 of 2017.
5. Investments & Partnerships With Marijuana Businesses
Acquisitions, partnerships, and direct investments have become the norm for the marijuana industry. There are numerous household names that have come into the fold as of late, and while many expected the tobacco industry to be quick on the uptake, the alcohol industry has actually led the marijuana charge.
As mentioned earlier, Constellation Brands (STZ), the producer of brands such as Corona, Modelo, and Svedka, is recognizing opportunity in the relatively young marijuana industry and has bought into Canopy Growth Corp on two separate occasions — once in October 2017 (9.9% ownership for $191 million) and again in August 2018 (now 38% ownership for an additional $4 billion). If Constellation utilizes future warrants as part of the deal, it could own more than 50% of Canopy Growth.
A competitor, Molson Coors Brewing Co (TAP) recognizes a similar opportunity. Molson Coors recently entered a joint venture with Quebec-based cannabis producer Hydropothecary Corp (HYYDF) to develop a non-alcoholic, cannabis-infused drink. Molson Coors will hold a 57.5% stake in the standalone company.
In technology, Shopify (SHOP), the large-cap payments SaaS company, also stands to gain from the marijuana industry’s growth. Shopify has longstanding contracts to handle online sales for growers like Canopy Growth and Aurora Cannabis, but with recreational legalization on the horizon in Canada, it has also penned deals with the provinces of Ontario (through the Ontario Liquor Control Board) and British Columbia (through private companies) to process brick-and-mortar, online, and mobile payments. Still, Shopify is a very large company, so it’s hard to say just how much its contracts with marijuana sellers will move the needle.
As the market for marijuana-based products expands in scope and breadth, so do investors and advocates. Current and future ventures include partners ranging from hip-hop legend Snoop Dogg to former house majority speaker John Boehner.
As stated earlier, Canada will legalize adult-use recreational marijuana on the federal level starting October 17, 2018. South of the 49th parallel, New Jersey is currently seeking to become the 10th state to legalize recreational marijuana.
While the marijuana industry continues to receive sizable attention and funding, there are future legislative and regulatory hurdles that will need to be overcome; as the tobacco and alcohol industries have shown us, laws and regulations can change like smoke in the wind.
Disclaimer: The content of this article is meant for educational purposes only and is not intended to be used as investment advice, nor is YCharts acting as an advising party regarding client funds in any way.