The marijuana megatrend is real.
A wave of legalization has swept across the U.S. and Canada in recent years, and now every single American either lives in a state where the drug is legal or within driving distance of a marijuana safe haven.
And it’s not just the U.S. that’s allowing residents to light up. Canada legalized marijuana this past fall, which has seen billions of dollars of cash flow through marijuana investments. And of course, many European countries have much more liberal views of the drug and have been embracing its use for years.
Moralize about the marijuana craze all you want, but one thing is for certain: The industry is becoming normalized, and its customers are about to inject legitimate capital into the real economy as weed moves out of the shadows.
Of course, the industry is not without challenges. Despite being legal for recreational use in 10 states and medically available in a total of 33 states, there’s a marijuana supply glut. In California, legal pot sales topped out at $2.5 billion — roughly 16% less than 2017 when only medical marijuana was available …
But time is on the side of the marijuana business. The reason for the recent marijuana oversupply isn’t a lack of buyers, but rather, circuitous regulation and lack of legal cohesion (on a local, state and federal level) is keeping buyers in the black market. Once the haze of regulation disperses, the market for marijuana will stabilize.
So the only question is, are you ready to get in on the ground floor? Or do you want to wait until it’s too late and the lion’s share of profits are behind you?
For investors looking to get in on this megatrend of marijuana, this report outlines five clear ways to play the trend.
But first, let’s look at the groundswell of support behind legalization and explore why this opportunity is durable — and highly profitable for investors who are in the know.
Legalization Has Reached a Tipping Point
Marijuana legalization has swept through America over the past few years. Thanks to recent votes, recreational marijuana is now legal in 10 states, and medical marijuana is legal in 20-plus more. That makes more than half of states — 33 out of 50 — on board with some form of decriminalization for the drug.
That trend is sure to continue, and it’s progressing at a faster pace than ever before. For instance, Vermont became the first state to legalize marijuana through the legislature, rather than a ballot initiative, in January 2018. That cut out the hassle of relying on an election cycle to implement changes and instead simply alters the law whenever a majority of elected officials cast their votes.
And there’s reason to expect those votes to keep coming. A recent poll by Pew Research Center showed roughly six-in-ten Americans support legalization, meaning legislators voting against legalization risk being on the wrong side of their constituents.
Furthermore, if more states pass marijuana legislation this year as expected, some estimates cite as many as 130 million Americans could have access to legal use of the drug by the end of 2019. That includes the entire population of California, which was the first state to legalize medicinal use of the drug way back in 1996 but recently passed recreational use laws. But this isn’t just a liberal West Coast issue, of course, as there has also been legalization in more traditionally conservative states like Maine and Nevada.
What Are the Risks?
It hasn’t always been easy going, however. Plenty of legalization efforts have failed over the years before popular sentiment shifted to favor decriminalization of the drug. There also have been recent actions in 2018 by the Department of Justice to enforce federal drug laws that may be restrictive to such state-level legalization. However, in one of the only bipartisan issues of the day, dozens of U.S. representatives on both sides of the aisle have begun teaming up an effort to stave off federal intervention in state cannabis programs under the idea that it violates the Tenth Amendment of the U.S. Constitution. Which, after all, defines the balance of power between federal and state governments.
Sure enough, that final item of the Bill of Rights notes, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” That would seem to clearly indicate state laws — particularly those brought into effect via popular vote in a ballot initiative — are outside the purview of federal oversight.
If you want a ringing endorsement of the marijuana industry, there is no clearer sign than an issue like this that unites liberals who dislike harsh criminal penalties on drug users and conservatives who fear federal overreach and think it’s not the government’s business to legislate morality.
The biggest practical hurdles, in fact, are the related laws and regulations surrounding legal cannabis that simply make it a headache for business owners. For instance, corporations trafficking substances like marijuana that are still technically illegal in many places and under federal law must file taxes under code 280E. That means typical business deductions are banned, with the exception of the cost of goods sold. That’s an incredibly onerous burden for a start-up to bear and marijuana-related businesses ultimately wind up paying significantly higher taxes than those of standard businesses.
However, that creates an interesting dynamic for investors. While it obviously would be better for the dominant players in the U.S. to reinvest more in their businesses instead of paying the tax man, it creates an odd dynamic where the entrenched players face less competition simply because of the very expensive cost to entry in this emerging marketplace.
In the long-term, of course, everything is bound to simply get easier for marijuana companies. The tentative first steps toward widespread legalization have been replaced by a steady pace of milestones that make nationwide acceptance all but inevitable.
The only question is which companies are best positioned to ride this megatrend, and which ones will be left behind.
What Not to Buy: Marijuana Penny Stocks
When the rumblings of a legalized marijuana industry started a few years back, there was a flood of risky startups that made their way to the pink sheets as “penny stocks.” These low-priced, money-losing enterprises were largely run by either pot-smoking opportunists with no business sense or by unscrupulous fat cats looking to scalp small-time investors with empty promises.
The most egregious was Medbox, a California-based company that was supposed to be selling marijuana vending machines, but actually falsified revenues via phony transactions — all while lying like crazy via overhyped press releases that started as early as 2014.
Insiders made a fortune, and a few very lucky early investors made a few bucks … but most lost their shirts as the company collapsed to a current price of less than a tenth of a cent.
Listen, there are very few legitimate investments in ANY sector trading for less than $1 a share on the pink sheets. Companies that small are a playground for scam artists and thieves, using “pump and dump” strategies to get rich at your expense. It’s simply not worth the risk, and often has worse odds than simply going to the casino and playing a roulette wheel.
Don’t be sucked in by promises of a stock going from a penny to dollar in short order, because that promise is too good to be true.
Instead, settle for performance based on reality — which admittedly may not increase your money 100-fold, but has the real potential to increase your portfolio 50%, 100% or even 200% in a year’s time.
No Good ETFs … Yet
Because of a dearth of high-quality stocks that are solely dedicated to marijuana, there hasn’t yet been a good exchange-traded fund offering for investors to tap into.
There’s the AdvisorShares Vice ETF (NASDAQ:ACT) but that’s not a pure marijuana exchange-traded fund (ETF) considering that it is meant to cover a wide array of “sin stocks,” including alcohol and tobacco companies.
There’s also the Index IQ Canada Small-Cap ETF (NYSEARCA:CNDA) that includes some fast-growing Canadian marijuana companies. But those holdings typically represent only 3% of the portfolio apiece — and you’re better off picking those individual stocks instead of having them scattered in there along with Canadian gold miners and energy companies.
Perhaps the best pure plays consist of the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) and Canadian Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ), but it’s way too early to tell if these are good or a bad funds. After all, the MJ ETF previously lived as an emerging market real estate ETF until the end of 2017 — and this is a big shift in strategy, along with a very dynamic sector where it can be more profitable to play a handful of individual stocks instead of the entire field.
That means in the absence of microcaps and ETFs, investors need to rely on individual stocks that are modest-sized marijuana names.
If you’re wondering exactly what stocks those would be … here they are.
Trade #1 – GW Pharmaceuticals
- Current price: $149.21
- 12-month price target: $178
GW Pharmaceuticals PLC (NASDAQ:GWPH) is a $54.2 billion company that is rapidly becoming one of the most popular ways to play legalized marijuana. That’s because the company has been public on the Nasdaq exchange since 2013, and has been focused on legitimate Food and Drug Administration-approved treatments for medicinal marijuana. Recently, GWPH has found that approval, and its stock price has soared 55% from its year-end lows.
The FDA approved GW Pharma’s cannabidiol-based drug, Epidiolex, making it the first cannabis-derived product on the market for the treatment of seizures in children as young as two years of age. The Drug Enforcement Agency (DEA) also classified Epidiolex as a schedule V drug, the least hostile category in the Controlled Substance Act. To put that in perspective, marijuana is placed under schedule I, the most hostile category.
Since going public, shares have soared a jaw-dropping 1,300%-plus, too!
That makes this more of a biotech company than a pot startup. And when you’re looking for a publicly traded investment to play the evolving regulatory and legal landscape around marijuana, you definitely want to look at a company like GW because of its experienced management.
Right now, the company is unprofitable — like many biotechs tend to be — as it only has one marketed product and remains focused on research. Specifically, its Sativex marijuana-based treatment for multiple sclerosis has been approved outside the U.S. However, the big mover in the near-term will be Epidiolex, a next-generation medical marijuana solution that was recently approved by the FDA.
Recreational marijuana is still having its moment at the ballot box, but medical marijuana is a much softer sell (and a big growth industry). GW Pharmaceuticals is perfectly positioned to profit from the near-term trends without the volatility based on unexpected “no” votes or setbacks on recreational drug use, and will undoubtedly have the necessary experience cutting through red tape to succeed in the growing marijuana space.
If you want a legit low-risk way to play the marijuana megatrend, GW is your best bet.
Trade #2 – Cronos Group and Aphria
This one’s a little bit of a cheat, but two is usually better than one. In this case, we’re adding Aphria to this list without taking Cronos Group (NASDAQ:CRON) out, despite CRON trading so near its price target — that tends to happen when you rally 110% in one month! Cronos is no stranger to these sorts of rallies. In fact, the legitimacy of becoming a legit marijuana stock on a major exchange was enough in and of itself to result in a roughly 30% pop for shares in the days right after its listing on the Nasdaq at the beginning of 2018.
Since listing on the Nasdaq, CRON stock is up more than 200%! The Canadian company is one of the top 10 pot players in the markets by market capitalization, and the liquidity benefits of the Nasdaq listing will only help it grow more going forward.
Cronos isn’t just a quirky play based on technicalities of the market, however. It has been handily executing on its growth and expansion plan across the last few years, and Cronos recently announced plans to begin operation in an 850,000 sq. ft. greenhouse, known as “The Facility,” which will produce 70,000 kg of cannabis per year.
That would make it the largest indoor cannabis production facility in the world. And with global deals that span across nations like Germany and Israel, Cronos clearly has its aims on much more than just the Canadian market in 2019. Analysts expect its revenue to reach $135.7 million in 2019, up from $35.8 million in fiscal 2018, and you’ll want to share in this growth.
Aphria (NYSE:APHA), meanwhile, is flying high on an unsolicited takeover offer from Green Growth Brands (OTCMKTS:GGBTX). Whether APHA stock will be bought out in a deal valued at $2.1 billion USD, below the company’s market capitalization of $2.55 billion. In response, Aphria urged its shareholders to do nothing, as GGB’s offer “significantly undervalues” the company.
Aphria reiterated its commitment to protecting shareholder value in the face of “opportunistic” takeover bids, which means APHA is likely to remain one of the few publicly listed pot stocks without a partner … at least for now.
The company prides itself on being “truly powered by sunlight,” as its products are 100% greenhouse grown. But, at the core of it, APHA is an investment in medical marijuana.
Medical marijuana will be a huge driver of growth, especially as legal red tape becomes less of a burden. Consider this: Where recreational weed is legal, so too are “edible” marijuana products. But in several medically legal jurisdictions, edibles, as they’re commonly known, are banned — including Maryland, Hawaii, West Virginia, Pennsylvania and North Dakota.
For many people, especially the elderly — who make up nearly a quarter of marijuana users in Canada — edibles are the best form of relief. If their marijuana dispensary doesn’t offer edible pot, they’ll have to buy the flower and go on a convoluted journey to infuse the THC and/or CBD with their food of choice. That can mean doses that vary wildly if not careful.
The lack of edibles is offputting to many who don’t enjoy the smell of smoking or cooking cannabis. As loosened regulations allow more jurisdictions to sell edibles, you can bet Aphria stock will be a huge beneficiary in the resulting surge in revenue.
Trade #3 – Canopy Growth
- Current price: $48.37
- 12-month price target: $60
Canopy Growth Corp. (NYSE:CGC) is one of the best ways to profit from the marijuana megatrend in 2019 and beyond. Canopy is Canada’s largest pot stock by market cap, with a $16.34 billion valuation, and has coverage from ten legitimate securities analysts from shops that include Piper Jaffray.
The company is not yet profitable, but in the fourth quarter of fiscal 2018 served 74,000 patients — up 35% from 55,000 patients in the year-ago quarter. Annual revenue also surged to $78 million from just $39.8 million the year before — an increase of 95%! And in the trailing twelve months, revenue clocks in at a whopping 94 million!
Looking forward, Canopy expects sales of roughly $805 million by 2020!
Admittedly, the company is trading for a big premium on those sales. But the growth is legitimate and impressive, and there’s little doubt Canopy will deliver.
Furthermore, Canopy is impatient. It’s supercharged its future prospects through ambitious acquisitions — such as its 2016 move to purchase Mettrum Health for $430 million — giving it access to roughly half of Canada’s medical marijuana customers and increased its production to include six licensed facilities and two more unique brands of product.
It’s a double-edged sword to be such an aggressive acquirer in this budding market, because a few bad deals at big price tags could really set Canopy back. However, if the strategy pays off, it will soon become one of the dominant marijuana companies in North America and operate at a scale few publicly traded companies can match.
In fact, Canopy announced a deal with Alberta Gaming, Liquor & Cannabis Commission (AGLC) to supply the Canadian market with premium cannabis products ranging from softgel capsules to oil to whole-flower products. That deal will facilitate the supply of more than 15,000 kilograms of recreational cannabis products for the first six months of Canada’s legal weed market.
Trade #4 – Aurora Cannabis
- Current price: $7.75
- 12-month price target: $11.80
Smaller and more volatile than Canopy is Aurora Cannabis Inc. (NYSE:ACB), but it shares many of the same traits. While ACB indeed used to trade on the pink sheets, and while it sometimes flirts with a stock price at or below $5, it isn’t a true penny stock.
After all, Aurora Cannabis is now listed on the New York Stock Exchange, trading hands at about $7.82 in U.S. dollars.
With a market cap of 7.7 billion, ACB is a legitimate small-cap company. Currently, it mainly produces and harvests marijuana in the Canadian Rocky Mountains for medicinal use, and is familiar with both the regulatory structure as well as the economics of the business. Heck, Aurora even has an app for patients to order their medicinal marijuana electronically on their smartphone! This kind of know-how will serve it very well in the future as the industry continues to evolve.
While its current operations are focused largely on harvesting plants for patients with prescriptions, marijuana legalization in the United States (and more recently in Canada) could open up a big growth path for Aurora in the next few years.
Yes, the company currently is operating at a loss. But it went from zero revenue in 2015 to over $73 million in the trailing twelve months, and it is growing fast … if you’re an aggressive investor, this is exactly the kind of company you want to be invested in to get in on the ground floor of the marijuana megatrend.
Like Canopy, Aurora could hit $800-plus million in sales by the end of next year. That would catapult this stock to instant success.
Trade #5 – Zynerba Pharmaceuticals
- Current price: $5.68
- 12-month price target: $19.25
Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE) is similar to others on this list in that it is a legitimate medicinal marijuana play that doesn’t care about ballot issues for recreational use. But what makes it a bit different is that rather than looking for solutions from cannabis plants alone, ZYNE is also pursuing drugs based on synthetic versions of drugs found in marijuana plants.
While the company scrapped ZYN001 for treatment of Tourette syndrome, the company’s CBD-based treatment of refractory epilepsy and osteoarthritis, ZYN002, has completed phase II testing of its Fragile X Syndrome indication.
Shares of ZYNE stumbled throughout 2018 due to a lack of near-term catalysts, but long-term investors believe in the potential of the company’s FXS treatment, which should enter Phase III testing shortly. In fact, ZYNE stock is up more than 60% year-to-date so far!
The risk here isn’t about sales trends or acquisitions at this point, but simply clinical trial data and typical volatility associated with drug approvals. But if you’re looking to play broader medical marijuana trends instead of dissecting federal marijuana laws, ZYNE is a great option — particularly considering that its focus on synthetic alternatives may make it more attractive to some consumers or even more effective in its clinical results than naturally grown marijuana.
Be careful with ZYNE, however. It is by far the smallest and most volatile name on this list.
