The legalization of cannabis for both recreational and medical uses is expanding in North America and investors, traders and corporations have taken notice. Several MoneyShow.com contributors discuss opportunities in the sector, with the added caveat that the sector is volatile and best suited for those comfortable with the inherent risks of an early-stage industry.
Adult use of marijuana will become legal in Canada on Oct. 17, and investors are piling in. So are the fraud peddlers, just as they played the cryptocurrencies in the past couple of years. One must be careful in playing this speculative market.
Meanwhile, cannabis stocks are moving up in anticipation of a gigantic legal market in Canada and eventually in the United States. Over 30 states have legalized medical marijuana use, and nine allow recreational use. More will follow.
According to Barclays, the cannabis market is large, with more than $150 billion in sales. As marijuana becomes more legal to use, this market could grow even bigger. I'm not a fan of smoking marijuana for recreational use, but its use as a medicinal drug is much bigger than most people realize. Some consider it a "vice," but for others it's a miracle drug for alleviating pain.
The biggest publicly traded company is Canadian cannabis grower Canopy Growth Corp. (CGC) , and I've recommended it twice already. The company is listed on the New York Stock Exchange, so it is very easy to trade. Canopy Growth is considered the kingpin of this industry and is expected to control 20% or more of the market share in the medical and recreational marijuana market.
It has the best-known brand in the country (Tweed), and has aggressively acquired other properties, such as Mettrum Health. Plus, it is expanding rapidly into European markets. It has 2.4 million square feet of marijuana-growing capacity under construction or in development in British Columbia, with the option of acquiring another 1.7 million square feet there for capacity expansion.
In August, beverage giant Constellation Brands (STZ) entered into a $4 billion deal to increase its ownership stake from about 10% of Canopy to approximately 38%. I wouldn't be surprised to see Altria (MO) , Philip Morris International (PM) and other big tobacco companies jumping onboard soon.
Like almost all cannabis stocks, Canopy is growing fast, but still hasn't reached profitability yet and does not pay a dividend. However, its outlook is positive. I consider it a speculative buy, but not for conservative investors.
Aurora Cannabis ACBFF -- Canada's #2 cannabis stock -- just announced two new acquisitions. They are the 11th and 12th deals in the last two years. Aurora is buying 100% of a small Eastern European hemp producer called Agropro and a processor and distributor called Borela.
Agropro has 4,000 acres under contract and plans to produce 1 million kilograms of organic hemp. Plus, the company has the option to double the production in Lithuania, Latvia, Estonia and Poland. This gives Aurora ownership of the largest organic hemp company in the European Union. Industrial hemp is expected to grow to become a $10 billion industry by the year 2025. Aurora plans to use the hemp to create wellness products for the European market.
The two acquisitions cost Aurora $9.5 million in Canadian dollars. That's a tiny acquisition for Aurora. Yet it's another signal that the cannabis land grab is underway. The big players -- funded with lots of cash -- are buying up the smaller companies.
Meanwhile, Coca-Cola (KO) could be planning to get into the cannabis market. The world's largest beverage company may want to develop drinks infused with cannabidiol or CBD; this is an ingredient from cannabis that treats pain -- but doesn't make you high. This could be used to reduce inflammation, pain and cramping.
Aurora would be an ideal partner for Coca-Cola. Aurora is a sizable producer with an international footprint in North America, Europe and South America. Aurora doesn't yet have an existing partnership with a beverage company. Coca-Cola could buy up 10% of Aurora for around $1 billion. That's a small investment for Coca-Cola, which has $20 billion in cash and short-term investments on its balance sheet.
The Scotts Miracle-Gro Company (SMG) manufactures, markets and sells consumer lawn and garden products worldwide. It recently acquired the top hydroponic nutrient supplier in the U.S. And it now supplies nutrients to a large share of the legal marijuana growers in the country.
There's so much latent value in Scotts brands. It's one of the biggest lawn and garden suppliers in the world. It has a massive gardening unit. And with General Hydroponics and the Sunlight Supply distribution chain, it has an almost monopoly on the cannabis nutrient market.
That should pay off for the company and for us down the road. Cannabis legalization will come at a federal level. And companies that are positioned like Scotts is will be riding a massive wave of profits for decades. Scotts Miracle-Gro is still a Buy anywhere under $80. The 12-month price target is $105.
Pyxus International (PYX) -- formerly called Alliance One -- purchases, processes, packs, stores and ships leaf tobacco for manufacturers of cigarettes and other consumer tobacco products worldwide. It also provides agronomy services for growing leaf tobacco.
And it's the majority owner of two Canadian cannabis companies. In September, Canada gave approval to one of its subsidiaries to produce and sell cannabis oil. And the shares went on a rampage, jumping 50% in a day before correcting. I expect that we'll see massive rallies ahead for this stock. Every time, a new batch of news reminds folks that this is the cheapest and most undervalued cannabis investment on the market. The stock is a Buy under $22.50; our 12-month target is $35.
Innovative Industrial Properties (IIPR) is a REIT that's focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities.
We're up over 100%, but we're still adding shares because the future potential here is just too big to even put into words. In less than a year, we've doubled our money. In a decade, we'll be looking at 1,000% or higher. We recently got a dividend boost as a reward for our investment.
And Innovative Industrial Properties recently boosted the payout by 40%. So, we're now getting $1.40 per share, per year. Expect more of those hikes to come and keep adding those shares. I'm boosting the limit some. But don't chase frenzied rallies. Stick below the limit and you'll likely be well rewarded in the end. I rate the stock a Strong Buy under $45 for a 12-month target of $60.
Cannabidiol, or CBD, provides physiological "comfort" through a variety of mechanisms that are not well known yet, primarily because it's been illegal under federal law to do the research.
And CBD sales are booming today, as growers of hemp ramp up production in response to increasing demand. Which brings me to CV Sciences (CVSI) , the biggest provider of CBD in the U.S. Headquartered in Las Vegas, CV Sciences makes CBD from hemp, packages it as sprays, capsules, pure oils and balms, and distributes it nationwide through health food stores, health care providers' offices and online.
And the company reported spectacular growth results in the quarter ended June 30. Revenues were $12.3 million, up 203% from the year before. Gross profit was $9.1 million, up 219% from the year before. And EBITDA was $3.8 million, up from a loss of $0.3 million the year before. I love companies growing at triple-digit rates.
First, I see a long-term uptrend, which is good. Second, I see the stock hitting a blow-off top of $9.20 on Aug. 20, just before a short-selling firm sent a tweet that kicked off a wave of selling. The stock needed a correction.
And third, I see a normal consolidation phase since then, with the stock bouncing off its 50-day moving average twice and then calming down in recent days as its 25-day and 50-day moving averages come together. This is probably a good entry point.
Canada has taken the lead on making pot legal throughout the entire country. Marijuana use in Canada will be legal in mid-October after legislation cleared regulatory hurdles in June. The trend toward the legalization of weed has created "reefer madness" in the price action of several pot stocks, where volatility is about as extreme as anyone could imagine.
There are several ways to invest in the potential marijuana boom. Many are plays for recreational marijuana, which will boom if legalization goes as expected. Many are medical plays, which are incredibly likely to be successful, but the upside is smaller. The last way is to invest in companies that happen to have a lot to gain from the marijuana industry but aren't necessarily reliant upon it for success.
A major catalyst that is fueling the pot stock rally and bringing credibility to the whole investment theme is the interest and entry by Fortune 500 companies into the space. This is what I deem the smart money trade in what is a highly speculative sector where there will be a few big winners and many more even bigger losers.
Depending on how the market for marijuana-based products develops, it might prove lucrative to own a basket of these stocks that includes both the blue-chip stocks that are partnering up with the pot pure-play companies and then pairing that high-quality basket by taking a position in the ETFMG Alternative Harvest ETF (MJ) , which owns all the hottest pot stocks that are getting the headlines.