With the recent farm bill legalizing hemp production in the United States and even more states moving toward at least partial acceptance of marijuana, marijuana-related businesses are generating new interest among investors. Still, not all stocks in the industry are worth considering investing in, even if the industry ends up growing like the “weed” marijuana is frequently known as. We asked three of our contributors to pick marijuana businesses that are worth watching in the current environment, and they selected Origin House (NASDAQOTH:ORHOF), Canopy Growth (TSX:WEED) (NYSE:CGC), and Innovative Industrial Properties (NYSE:IIPR).
A kingmaker in California
Keith Speights (Origin House): Investment firm Beacon Securities thinks that distributors and retailers could be the “kingmakers” for cannabis brands. Assuming that view is correct (and I think it is), Origin House is in an excellent position to be the kingmaker in the biggest legal marijuana market in the U.S. (and in the world, for that matter): California.
Origin House ranks as the top distributor of cannabis products in California. There are several reasons why investors should watch this stock closely in January, starting with the company rolling out more of its own brands in 2019. Origin House plans to shift its revenue mix from 70% from distribution and 30% from selling its own brands to a 50-50 mix this year.
Another thing to watch with Origin House is growth in the California recreational marijuana market. This market got off to a slower-than-expected start in 2018 due primarily to cumbersome regulatory processes and too-high tax rates. However, expect more dispensaries to be licensed in 2019, which will work to Origin House’s benefit.
Origin House recently announced that it has taken steps to fend off potential hostile takeover bids after being “approached by several public cannabis companies contemplating stock-based offers to acquire” it. While the company clearly isn’t interested in selling out at a price tag that doesn’t value its prospects highly enough, investors will definitely want to keep their eyes open for potential deal making.
A billion-dollar opportunity
Todd Campbell (Canopy Growth): One stock worth watching this month is Canopy Growth, because Constellation Brands (NYSE:STZ) just told investors that Canopy Growth’s goal is a $1 billion sales run rate within the next 18 months.
Constellation Brands, which owns 38% of Canopy Growth, delivered that auspicious news during its earnings conference call this week, and there’s reason to think Canopy Growth can reach its target, even though its current sales pace is south of $100 million.
You see, Canopy Growth’s medical-marijuana market share in Canada is above 30%, and while it remains to be seen if it can achieve a similar share of the recreational market, the recreational market in Canada is big enough to suggest it alone could help Canopy Growth get to the 10-figure mark.
According to Deloitte, Canada’s recreational market sales could be as high as 4 billion Canadian dollars, and its medical-marijuana sales could be above CA$770 million in 2019. Couple the opportunity in Canada with growing sales in Germany, which accounted for about 10% of Canopy Growth’s CA$23 million in sales last quarter, and an emerging opportunity in the U.S., and you have a recipe that could cause sales to skyrocket.
Marijuana remains illegal on the federal level in the U.S. However, Congress passed a new Farm Bill in December that removes hemp, a type of nonpsychoactive cannabis, from the controlled-substances list, which clears the way for increased farming and more products containing hemp-derived cannabidiol, the chemical cannabinoid most associated with medicinal benefits. That prospect has Cowen analysts forecasting that sales of hemp-based products will be $1.6 billion over the next one to two years.
Canopy Growth won’t secure all of that new revenue, but it’s already laying groundwork to capture its fair share of the opportunity, giving investors good reason to pay attention to this cannabis company now.
A picks-and-shovels play for the modern marijuana boom
Chuck Saletta (Innovative Industrial Properties): The increasing legality of marijuana and marijuana-related products is setting a foundation for the potential of booming growth ahead. The big challenge with marijuana investing, however, is that the marijuana plant itself has a habit of growing like a weed. It’s fairly easy to cultivate, which will make it challenging for even the early movers to remain profitable assuming full legality kicks in.
That’s a huge part of what makes Innovative Industrial Properties a compelling stock to watch this January. A real estate investment trust that centers on the medical-use cannabis industry, Innovative Industrial Properties focuses on the growing infrastructure underlying marijuana rather than selling the plants. That makes it something of a picks-and-shovels play in the industry.
If further legalization takes hold and competition starts to intensify, profit margins will likely become squeezed among the growers and sellers of marijuana. As long as there’s demand for marijuana, however, facilities like those owned and leased by Innovative Industrial Properties should still be able to find someone willing to lease their space.
The advantage Innovative Industrial Properties has is twofold. First, its facilities are all existing greenhouse spaces. Since they are existing spaces, its major capital expenditures are largely sunk costs, meaning new competition will have to invest in the facilities, infrastructure, and know-how just to catch up. As greenhouses, those spaces have the advantage of better climate-controlled growing conditions over anyone trying to compete with fields alone.
Second, as a company that has a presence in several states across the country, it has a scale advantage over smaller players. That allows it to better experiment and learn what works to further increase the yield and efficiencies at its facilities.
Innovative Industrial Properties is currently profitable, which means it can operate effectively in today’s regulatory climate. If further legalization means competition will heat up, its infrastructure focus makes it well positioned for that eventuality too. That combination makes it worth watching for investors.
Chuck Saletta has no position in any of the stocks mentioned. Keith Speights has no position in any of the stocks mentioned. Todd Campbell has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands, Innovative Industrial Properties, and Origin House. The Motley Fool has a disclosure policy.