“It’s a tremendous global opportunity.”
This is what cannabis research expert Jason Wilson shared with Frank’s audience on a recent episode of Wall Street Unplugged.
Wilson works with ETFMG, a company that specializes in creating funds for investors who want to focus on a particular industry. And it’s the leading exchange-traded fund (ETF) issuer behind MJ—the world’s largest cannabis ETF.
Wilson explained, “We’re going to see federal legalization in the U.S… and quite likely in the next few years we’re going to have 40, pushing 50 countries globally that have medical cannabis programs.”
In 2019, the cannabis market brought in $13.2 billion in sales. By 2025, according to New Frontier Data, this market is expected to reach over $35 billion… a 165.7% increase, and an enormous global opportunity for investors…
But while there are numerous stocks to choose from, cannabis is still an emerging industry… and you need to be careful where you put your money.
Today, I’ll explain why cannabis stocks hold so much potential … and four ways to play this booming industry.
Why the cannabis industry is poised for growth
As you probably know, the cannabis market is exploding as U.S. states push to legalize marijuana.
Twenty years ago, cannabis was completely illegal. California became the first state to legalize medical cannabis in the mid-1990s. Today, more than 30 states have approved medical cannabis and more than 15 have approved it for recreational use.
In fact, legalization is a worldwide phenomenon. More than 40 countries have legalized medical cannabis or are in the process of legalization.
And the United Nations just voted to reclassify cannabis as a less dangerous drug. This opens the door to greater recognition of the medical and therapeutic potential of cannabis.
This is only the beginning… We’ll likely see federal legalization in the U.S. within the next few years. There’s already growing public and congressional bipartisan support.
Cannabis stocks soared recently after President Trump said his administration would cooperate in the transition to Joe Biden’s presidency. Most investors view President-elect Biden as more lenient in his marijuana policy than President Trump was.
In short, the industry looks poised for long-term growth as more states and countries legalize cannabis. That’s a benefit for investors as well as the patients who rely on cannabis products for their medicinal properties. And local economies will also benefit as the industry creates additional jobs and tax revenues.
How to profit from cannabis
Before investing, investors should get a basic idea about the types of companies that make up the industry.
In short, there are three types of companies you can invest in:
- Marijuana growers that produce the product
- Cannabis-focused biotechs that develop medical therapies
- Companies that support the industry by selling supplies and services
As I mentioned earlier, it’s important to select the right companies since the industry is still young and volatile. While there are promising biotech stocks, I feel the best near-term potential lies with growers and support companies. I’ve chosen the three companies in the industry with the best near and mid-term prospects based on my research. These include one grower and two support companies.
Canopy Growth (CGC)
Canopy Growth (CGC) cultivates and sells medicinal and recreational cannabis under a variety of brand names, including Tweed, Spectrum Therapeutics, and CraftGrow. The stock has had a great year, up more than 26% through December 1st. Canopy is one of the stocks mentioned by Jason Wilson during his Wall Street Unplugged appearance.
Looking at its sales, Canopy outperformed the majority of its competitors this year. The company reported 77% revenue growth in its fiscal second quarter, easily beating analyst expectations. It also reported a 178% increase in Canadian recreational sales in the quarter. It’s also worth noting that Canopy is gaining market share from competitors—it currently has 15.5% of Canada’s recreational market.
Another important advantage for Canopy is its exposure to the U.S. market. Cannabis is still illegal in the U.S. under federal law, which makes the U.S. market a bit tricky for most large companies. Canopy has a clever strategy that involves a conditional buyout of Acreage Holdings. In short, Canopy can acquire Acreage when marijuana is federally legalized in the U.S.
In the meantime, Acreage continues to establish itself in the U.S. market. The company recently reported 42% revenue growth in the third quarter.
Another reason I like Canopy is for its strong balance sheet. The company has the financial backing of Constellation Brands (STZ). So, if you’re looking for a cannabis producer, Canopy is the way to go.
Another way to invest in the cannabis industry is through a cannabis supply company. There’s a booming market for supplies for hydroponics and organic gardening. Hydroponics is the process of growing plants without soil in liquid nutrient solutions.
GrowGeneration (GRWG) is the largest retail chain focused on supplies for cannabis growers. The company sells equipment to small and mid-sized cannabis growers, as well as individuals. It operates 36 gardening and hydroponic stores plus a website.
GrowGeneration posted record sales during the COVID pandemic. The company saw a surge in new customers who have started growing their own cannabis at home.
During its most recent quarter, sales were up 123% vs. the same period last year. In August alone, the company saw a 50% increase in walk-in business compared to the previous quarter.
These strong results have sent the stock soaring. Shares of GrowGeneration are up more than 700% year to date (through Tuesday). The future looks bright for this company, as it continues to expand its retail store footprint. The company is also expanding using acquisitions. It recently bought The GrowBiz, a hydroponic garden center chain.
Innovative Industrial Properties, Inc. (IIPR)
If you’re concerned about volatility in the industry, a safer option to consider is a real estate investment trust (REIT) that offers indirect exposure to cannabis.
Innovative Industrial Properties acquires real estate assets for medicinal marijuana production. The company typically buys a property from a medical cannabis operator and then leases back the property to the operator.
Using this strategy, Innovative Industrial Properties has built a portfolio of more than 60 properties. Together, these properties create a stable revenue stream as the company collects rent from the marijuana growers.
The company is still in the growth phase. Over the last year, it added 18 new properties to its portfolio, growing it from 46 to 64. And there’s plenty of room for additional growth. After the recent U.S. elections, there are now 35 states that have voted to legalize medical marijuana. Innovative Industrial Properties only operates in 16 of them.
Besides leasing new properties, Innovative Industrial Properties is also acquiring similar companies in order to expand its business. In its most recent quarter, the company posted an incredible 197% revenue growth vs. the same period last year. Net income also surged 210% for the quarter. This growth hasn’t gone unnoticed, as the stock is up about 110% year to date. As an added bonus, the company also offers a 3.1% dividend yield. In fact, its dividend payout has increased by 368% over the last three years.
ETFMG Alternative Harvest ETF (MJ)
While many investors prefer to invest in individual stocks, ETFs are a great way to diversify while gaining exposure to an entire portfolio of companies in an industry.
Buying an ETF works the same as buying an individual stock. However, these funds own dozens (or even hundreds) of stocks, which means we get the benefits of diversification. And, as you probably know, diversification is one of the best ways to reduce the volatility of your portfolio.
My favorite ETF for the cannabis sector is the ETFMG Alternative Harvest ETF. This ETF is managed by Jason Wilson. As I mentioned earlier, he recently appeared on the Wall Street Unplugged podcast.
The fund was launched in 2015 and currently has $921 million in assets under management. The ETF is the world’s largest ETF (and the first in the U.S.) to target the global cannabis industry.
What makes the fund unique is that it focuses on the entire cannabis ecosystem. That’s what interests me. Even with a bright future, not all cannabis growers are performing as well as Canopy Growth right now. The fund provides exposure to all facets of the industry, including stocks not focused on production, which in some cases are performing better.
For instance, in the top ten holdings, there’s an allocation to GrowGeneration, which I covered earlier. In total, the fund currently holds 33 securities, and most of the holdings have global operations.
If you’re looking to take advantage of the growth in the cannabis industry, each of these three picks would be a great place to start.
The cannabis market in the U.S. and Canada will likely be volatile over the next couple of years, which is why it’s essential to pick the right companies to invest in. Canopy Growth (CGC), GrowGeneration (GRWG), and Innovative Industrial Properties (IIPR) are already leaders in their fields, and I expect their growth to continue.
The ETFMG Alternative Harvest ETF (MJ) provides an all-in-one option for investors looking for diversified access to the cannabis industry.
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