How to Invest in Cannabis Stocks In 2020
The marijuana industry is growing at an unprecedented rate and 2020 will likely be its most profitable year in history.
The marijuana industry is growing at an unprecedented rate and 2020 will likely be its most profitable year in history.
The marijuana industry is growing at an unprecedented rate and 2020 will likely be its most profitable year in history. The following five marijuana stocks may just come out on top.
2019 was a pivotal year for cannabis stocks due to the legalization of recreational marijuana across Canada. In the U.S., laws surrounding cannabis use have continued to evolve state by state—Missouri and Utah legalized medical marijuana and Michigan became the 10th state to legalize recreational use. In addition, the 2018 US midterm elections ushered many progressive representatives into U.S. Congress who support further changes to federal marijuana laws.
These advancements suggest that 2019-2020 will be a landmark year for cannabis stocks. The supply issues that plagued the launch of Canada’s recreational market have been ironed out and the regulations regarding edibles are also nearing finalization. In the United States, it seems likely that matters of legalization will continue to be determined by each individual state.
But which cannabis stocks should you keep an eye on through 2020? Here are the five that you won’t want to overlook.
Prior to investing in any stocks, it’s vital to familiarize yourself with the industry. The production and sale of marijuana has more intricacies than one might initially expect. Geography, for example, is a huge factor. In Canada, cannabis stocks have garnered a lot of interest from investors due to the maturity of the country’s medical marijuana scene as well as the eagerly awaited legalization of recreational use in October 2018. The buzz around this market is why Canada is now home to the world’s largest cannabis producers.
While many marijuana companies operate from Canada, in 2019 the country is responsible for less than 12% of worldwide cannabis sales as reported by Arcview Market Research and BDS Analytics. The U.S. remains the financial epicentre of the cannabis industry and is responsible for approximately 80% of annual revenue.
Within the industry, there are several subsects of operation which results in a variety of different types of marijuana stocks.
There are three central types of cannabis stocks. They are:
Producers are the most straightforward way to invest in marijuana stocks. Producers use greenhouses to grow top-quality cannabis and distribute the harvest to clients.
Companies that provide ancillary products and services are not responsible for actually growing cannabis plants but instead provide the products and services required by marijuana growers. This can involve anything from quality fertilizers to financial planning services.
Finally, drugmakers are the pharmaceutical organizations that focus on the development of prescription drugs containing ingredients from the marijuana plant called cannabinoids. These pharmaceutical companies operate clinical trials and, following approval by the U.S. Food and Drug Administration, assume responsibility for marketing the finished product.
The two most important factors to identify when looking to invest in marijuana stocks are no different than what you should seek in stocks from any industry: are there opportunities for growth and, if so, how can I take advantage of these opportunities?
In the majority of cannabis stocks, opportunities for growth are abundant. Countries all over the world are moving to legalize medical marijuana. Within the U.S. more states are shifting in this direction as well, with some even legalizing recreational marijuana.
It is essential that geography remains a consideration when dealing with marijuana stocks. Some Canada-based cannabis stocks are not prohibited to conduct business in the U.S. because selling marijuana remains illegal at the federal level.
Forecasting the growth of a marijuana stock can be quite complex. For example, the capacity of a marijuana producer (the number of kilograms of cannabis that a producer can grow per year) and how the finished product is distributed can greatly impact the overall growth of a company. The strength of competitors in the marketplace can also affect the performance of a stock.
Some marijuana stocks currently have exciting opportunities for growth and these companies are poised to take advantage of the cannabis climate.
Constellation Brands is best known for being the top-ranking beer company in the United States with popular products such as Corona and Modelo on their roster. Growth in the beer industry has largely stagnated but Constellation Brands has managed buck the industry trend and continue expansion with its premium array of craft beers. In addition to their booming beer business, in August 2018 Constellation Brands obtained a 38% ownership stake in Canopy Growth, the world’s largest cannabis company.
Constellation invested $4 billion in Canopy Growth to capitalize on this unique moment in history where there is a seismic shift in both public opinion of marijuana and the legal policies concerning its use. This “once-a-century disruptive market transition” was an opportunity too promising to pass up. Constellation is one of several drink manufacturers that has been enticed by the prospect of developing a new classification of beverage: marijuana-infused drinks. This interest in following a new trend could be driven by an undercurrent of concern that the legalization of cannabis may lead to a decrease in sales of alcoholic drinks.
By diving into the cannabis industry, Constellation is attempting to neutralize any losses that could occur as customer interest shifts away from alcohol towards marijuana. Constellation believes that getting involved in the cannabis industry will pay off in the near future—they project that within 15 years it could be a $230 billion market. While Constellation and Canopy won’t amass the entirety of that market, they estimate that they could hold up to 40% in Canada and 5% to 15% of the global market. Limited capacity won’t stand in their way as Canopy Growth currently owns 4.3 million square feet of licensed production space and will likely continue to grow. They have a total of 5.6 million square feet of growing space which is the largest of any cannabis producer in Canada. Canopy has also brokered supply agreements across all of Canada’s provinces and has a significant presence on the world’s stage with operations located in Australia, Europe, Latin America, Africa, and the Caribbean. Constellation also has well-established beer-related retail operations in the U.S. that can be relied upon to distribute Canopy’s marijuana products immediately if U.S. federal laws suddenly evolve to allow expansion in the market.
Constellation and Canopy have combined to form quite a dynamic duo. While there are other partnerships between cannabis producers and industry outsiders, none have joined forces so seamlessly and none are advantageously positioned to the degree of Constellation and Canopy.
You may be wondering why Constellation Brands is a more enticing investment than Canopy Growth—the benefit of investing in Constellation is that they already have a booming operation centred around the production and sale of beer, wine, and spirits. This pre-established business offers stability while Constellation’s foray into the marijuana industry provides a further opportunity for growth as the cannabis market explodes. Constellation is also positioned to purchase a majority interest in Canopy Growth down the road which is likely to happen should the cannabis market expands as rapidly as projected.
There are a few other bonuses that come with the Constellation package. Constellation stocks are traded with a forward price-to-earnings ratio (share price divided by forecasted earnings per share) of less than 18 and a price-to-sales ratio (share price divided by sales per share) of 4.3%—this is a far more alluring assessment than is claimed by Canopy Growth. In addition, Constellation presents a humble dividend yield (annual dividend paid divided by share price) of 1.6%.
Innovative Industrial Properties is a real estate investment trust that focusses on the medical marijuana industry. A real estate investment trust (or REIT) is an investment company that owns real estate. This allows retail investors the opportunity to participate in real estate growth when they may have been otherwise unable to carry the financial weight of a building purchase. REITs are an appealing stock option for cannabis investors because the risk is spread across multiple leaseholders—if a couple of risks flounder it does not tank the entire investment. Today Innovative Industrial Properties holds nine properties for growing cannabis, all of which are greenhouses or alternative indoor facilities.
Industrial Properties has two main opportunities for expansion. Firstly, the company has the ability to expand production in the seven states where it currently operates: Arizona, Maryland, Massachusetts, Michigan, Minnesota, New York, and Pennsylvania. According to Arcview Market Research and BDS Analytics, the states of Arizona, Massachusetts, and Michigan could each have a cannabis market of more than $1 billion by 2022.
The second growth strategy of Innovative Industrial Properties is to enter additional states. Medical marijuana is now legal in 31 states and many producers may find it more convenient and financially prudent to lease a facility rather than buy a facility. This may generate future opportunities for Innovative Industrial Properties.
One thing that bodes well for Innovative Industrial Properties is their impressive balance sheet. The company is debt-free which means capital is available to invest in additional properties.
Innovative Industrial Properties is financially successful due to the fact that all of their properties are leased and generate a yearly return of 15.7% on investments. The company has an average lease-length of 15 years and caters to both large and small tenants—this secures a reliable stream of income for the company. Those investing in Innovative Industrial Properties also have a handsome dividend to look forward to. As a REIT, the company must restore a minimum of 90% of taxable income to shareholders by way of dividend payouts. Innovative Industrial Properties currently has a dividend yield of 2.69%.
While other REITs may invade the marijuana market, Innovative Industrial Properties has established itself as an expert in the industry.
KushCo Holdings is the premier supplier of packaging in the U.S. marijuana market. This company drew attention for its products such as pop-top bottles, vaporizer cartridges, and tubes, all of which were designed specifically for cannabis products. They are positioned for growth because they have a reliable reputation as packaging experts in the marijuana industry. As the cannabis market expands in the U.S. and globally, KushCo will likely swell in tandem. Marijuana Business Daily predicts that the U.S. market will grow by more than 300% by 2022 and boast sales of more than $22 billion. The company is eager to obtain a significant share of the market’s packaging component. They also have a vape device segment that is likely to grow as the public demand for vape products climbs.
KushCo is also pursuing growth in Canada and in Europe. Canada’s legalization of cannabis has thus far made them a primary target but Europe is an area with great potential as countries such as Germany and the United Kingdom move towards legalization of medical marijuana. KushCo is also broadening its scope and exploring other sectors of cannabis supply and distribution. They acquired Summit Innovations in May 2018 and subsequently founded Kush Energy in order to facilitate the sale of hydrocarbons and solvents, both of which are essential for the extraction of cannabinoids from marijuana plants.
Zack Darling Creative Associates and its subsidiary The Hybrid Creative were also acquired by KushCo in the summer of 2018. This union leads to other growth opportunities in the cannabis industry in the realm of marketing, branding and e-commerce.
KushCo may face competitors in the future but their current rate of growth will ensure they have a nice nest egg if giant packaging companies choose to begin catering to the marijuana industry. The company has been dedicated to building relationships with cannabis producers and have tailored their products to their specific needs. This undoubtedly provides KushCo with an edge in the industry.
At a cursory glance, Liberty Health Sciences may appear to be a narrow market. The company is a producer of cannabis for medicinal use and conducts business in the state of Florida. Upon closer inspection, however, you’ll see that Liberty Health Sciences may be a hidden gem. Arcview Market Research and BDS Analytics project sales of $1.7 billion across the state of Florida where there are currently only 14 licensed producers. Liberty Health Sciences is one of them.
CEO of Liberty Health Science George Scorcis estimates that the company currently has a 15% share of the market which is an enviable position for a company with scarcely any competition. Liberty is in the process of increasing the size of their production facility and are also opening up more storefront dispensaries; Scorcis predicts these two big moves will lift Liberty’s market share to 25%. Liberty’s prosperous position in the state of Florida makes it a prime investment for potential investors. The financial worth of the company’s outstanding shares, or the market cap, is only slightly elevated from the projected annual sales that Liberty is likely to achieve in Florida within several years.
The future of Liberty Health Sciences isn’t confined to Florida alone. In 2019 they were set to open a dispensary in Ohio and have future plans for Massachusetts, New Jersey, and Pennsylvania.
Origin House is the premier California-based distributor of cannabis products. The company distributes more than 50 cannabis brands and stocks 70% of dispensaries across the state. The thriving California market positions Origin House in an area ripe for prosperity. In 2018, the state launched its recreational marijuana market and sales are expected to double by 2022 which will result in a $7.7 billion industry. This accounts for a quarter of global cannabis sales. Origin House is likely to reap the rewards of being the distributor for so many lucrative brands.
In addition to distributing first-rate brands, Origin House also sells a brand of its own. As reported by CEO Marc Lustig, 70% of sales are derived from distribution services but 30% stem from selling Origin House brand cannabis. As the company wins more brands, this divide is expected to move to a 50/50 split.
While the lion’s share of Origin House’s business is generated in California, the company is actually Canadian owned and significant growth in Canada throughout 2019 is anticipated. In fall 2018, Origin House purchased 180 Smoke, a popular retailer of vape devices that has 26 storefronts in Canada and a strong online presence.
Origin House is fostering long term plans to reproduce the profitability they experienced in California in other states and markets. The company specifically has its sights set on the exportation of its brands to other states within the U.S. While competitors are always regarded as a threat, Origin House is unlikely to be displaced from the top as long as they continue to provide quality service in California.
Origin House’s distribution service has done a great job of setting them apart from the tough competition in the cannabis market space. As distributors, they have intimate knowledge about the brands they handle—which sell best, and which would be strategic acquisitions. These assets ensure that Origin House is one of the best-kept secrets on the market.
While investing in the marijuana industry may be rewarding, there is always an element of risk involved. In the U.S. it is possible that industry growth could collapse due to federal laws that slow or ban the sale of cannabis. While things are trending in a positive direction and a ban is unlikely it remains a possibility. The outcome rests in the hands of the federal government.
In 2020 it will be critical to gauge the new U.S. Attorney General’s attitude towards marijuana. Jeff Sessions, the prior Attorney General, was staunchly against the legalization of cannabis and facilitated the repeal of policies Obama implemented to block the Department of Justice from meddling in states that had legalized cannabis. Only time will tell what position William Barr, Session’s successor as Attorney General, will take when it comes to marijuana. Those looking to invest should also be mindful of legislative attempts to modify federal laws that leave marijuana policy to individual states. Any impediments in this area could cause stock prices to plummet.
There is also always the danger that the cannabis market will not expand at the predicted rate, both in the U.S. and worldwide. Most market forecasts are based on the assumption that more countries will legalize medical or recreational marijuana and if this doesn’t occur cannabis stocks could suffer. It’s also possible that markets like Canada where cannabis has already been legalized will not continue to grow at the steep rate that is expected—this could be for a variety of reasons such as harsh regulations, high taxes or supply issues.
With respect to the five cannabis stocks profiled above, there is always the possibility that a strong competitor will rise through the ranks and be more fruitful. All five of those companies benefit from being early to the market but a head start certainly doesn’t make them invincible.
Because of these market hazards, investing in cannabis is ideal for ardent investors. Even aggressive buyers should be informed about the market and its quirks and invest with discretion—to be extra safe only invest a small fraction of your portfolio in cannabis stocks.
There are two things to keep in mind when buying cannabis stocks in 2020 and beyond. One is to buy the right stocks. Evidence suggests that Constellation Brands, Innovative Industrial Properties, KushCo Holdings, Liberty Health Sciences, and Origin House are on the right track.
The second is to acquire stocks with a long-term plan in mind. Any of these stocks could see short-term ups and downs but if the global cannabis industry grows at a rate that is even close to what is projected then there will be an abundance of profitable stocks. These five stellar cannabis stocks are very likely to be in that profitable category.