One of the hottest growing trends on Wall Street right now is marijuana. The market is opening up in a huge way as it becomes legal in more places both medically and recreationally. I’ve made money in it from time to time as certain events (such as elections) have boosted the entire sector, but this is now an unprecedented mega-trend that is still in its early stages.
Estimates of where the marijuana industry will be in the years ahead vary greatly, mostly because there are still a lot of unknowns. What states will legalize medical marijuana? Will those that already have medical marijuana try to legalize it recreationally? How will it be accepted and will it overtake cigarettes and alcohol? And finally, will it ever be legalized federally?
In North America this year, sales of legal marijuana – used both medically and recreationally – should come in between $8 and $10 billion, which represents a 50% increase over 2017. Medical marijuana sales will continue to grow at a compound annual rate of 21% through 2022. And recreational sales are expected to increase to $24.1 billion by 2021, according to Arcview Market Research. RBC Capital Markets looks out even further and predicts that U.S. marijuana sales will reach $47 billion in ten years.
Let me put those numbers in perspective. Last year, McDonald’s (MCD) brought in sales of $8 billion in the United States. If that numbers stays static, that would mean there were more sales of legal cannabis than there were of Big Macs and chicken nuggets. And I think that says a whole lot about the scale of this industry. Once it becomes more widely accepted and potentially legalized on a federal basis, the upside is almost limitless.
Investing for the Future
The marijuana industry is very news driven, and we just saw the power of a positive headline last Wednesday after Canopy Growth (CGC) announced that Constellation Brands (STZ) was investing $4 billion into it. This is a huge deal, and in all honesty it could be the biggest news out of the marijuana industry ever. Constellation is a big-time company – a Fortune 500 company at that – that primarily makes and sells beer, wine and spirits. It has the most sales of any beer import company in the world and is third in market share among beer suppliers.
STZ already had a 9.9% stake in CGC from a prior investment in October 2017. The most recent infusion of cash results in STZ owning 38% of CGC. If you think about the over $4 billion STZ has invested in CGC, it is significant when compared to the market cap of $39 billion. This is huge, and it means especially great things for CGC, which is one of my favorite marijuana plays.
For those who aren’t familiar with it, Canopy is the largest publicly traded marijuana company in the world. It currently has operations in eleven countries around the globe. Plus, it is multiple businesses in one, from production (growing marijuana) to extracting the essential parts of the plant to researching new formulations and products that can be sold over the counter or approved as drugs.
The investment in CGC is a ringing endorsement of both Canopy’s potential as well as the anticipated growth of cannabis in general. At the time of the first investment, Constellation’s CEO Rob Sands said he believes that the legalization of marijuana in the United States is “highly likely given what’s happened at the state level.” I’m completely on board with that thinking, and by getting its foot in the door early in Canada, STZ (and therefore CGC) stands to benefit greatly once marijuana is also legalized in the United States.
There are a few takeaways from the seriously huge announcement. First, it shows just how mainstream investing in the marijuana industry has become.
Second, this will lead to other large-cap vice companies making similar moves. I expect alcohol and tobacco companies to begin to speed up investing in Canopy’s peers.
Lastly, Constellation not only invested a large amount of money, it did so at a huge premium. The alcohol company paid 51% above the closing price the day before the announcement. Again, this shows just how positive Constellation is on the long-term prospects of the industry.
I am confident that the U.S. government will follow in Canada’s footsteps and eventually decriminalize the recreational use of marijuana sometime in the next few years. But when this finally happens, the really big money will have already been made. That’s why I have my subscribers investing early.
All told, CGC has soared about 63% since August 14, and I don’t see its momentum slowing down any time soon as the industry continues to explode. In fact, on Monday I discussed the big marijuana trends and best stocks to invest in with marijuana expert Michael Berger, who has been deeply involved in this burgeoning sector for over a decade. I will be sharing my interview with my Early Stage Investor subscribers soon, and if you’re interested in hearing what he has to say you can sign up for my service here to find out all about it.