• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Stocks

Cannabis a Rising Star in Morningstar Mag

Morningstar Magazine offers insight into future growth potential for cannabis industry and stocks.
By DEBRA BORCHARDT
Nov 25, 2019 | 03:20 PM EST
Stocks quotes in this article: CGC, ACB, TLRY, CRON, STZ, BUD, SMG, CURLF, ACRGF

Research company Morningstar released the 2019 winter edition of its Morningstar Magazine and inside revealed big possibilities for the cannabis industry.

Among the findings, was that in about a decade, the cannabis market could expand to $68 billion, and even higher if public and private insurers offer coverage for medical use. Analysts also saw huge untapped potential for the legal recreational and medical use of cannabis and singled out several companies such as Canopy Growth (CGC) , Aurora Cannabis (ACB) , Tilray (TLRY) and Cronos (CRON) for their moves to lower costs by moving production to other countries.

Here are some of the key views on cannabis:

Big Growth Potential

One reason Morningstar may have devoted so much space to cannabis in the publication is that it sees tremendous growth ahead for the industry. Morningstar believes that legal adult-use cannabis has only penetrated 8% of its estimated market and medical marijuana has penetrated only 21% of its projected market. It estimates that the total market will grow to $68 billion by 2030 with 35 million people consuming cannabis. That equates to a demand for 7,000 tons of cannabis annually and is 12-times larger than today.

The analysts also determined that if medical marijuana were covered by Medicare, Medicaid, and private insurance, the market could be in the range of $80 billion to $90 billion by 2030. 

Medical Use Getting OK Globally

The analysts noted that the international market for medical marijuana is severely underpenetrated and could grow by 11 times. Exports from Canada could reach $20 billion by 2030 vs. the nearly $4 billion right now.

"We think Canada will struggle to maintain its position as the top exporter as lower-cost producers emerge around the world," read the publication.

Companies Looking Worldwide to Cut Costs

The analysts named Canopy Growth and Aurora Cannabis, which both have five-star ratings, and Tilray and Cronos, which both have a four-star rating, as either planning to move, or already moving, operations in other countries that allow for cheaper production and lower-cost labor.

"We think all four companies will still benefit from widening international medical legalization," it said.

The publication, however, warned that internationally there is a lack of supportive laws and that the stigma against cannabis remains in many countries.

It also singled out Aurora for its focus on clipping costs elsewhere, too.

"Unlike many of its peers, Aurora Cannabis is focused on becoming the low-cost cultivator of the industry by developing advanced automated production," read the publication. 

It cautioned, however, that these advances will likely be copied by competitors and that Aurora has yet to receive a big investment from a mainstream powerhouse.

"But for investors who want to invest in the cultivator that leads the way in driving production costs down, we think Aurora is the best option."

U.S. May Turn Over a New Leaf on Legalization

"We expect the U.S. to become the largest cannabis market in the world. We believe, however, that the federal government will eventually let states decide their own cannabis laws," said Morningstar.

The publication picked five-star rated Curaleaf (CURLF) for its pure-play exposure to legalization in the U.S. and Canopy was chosen for its acquisition plans of Acreage Holdings (ACRGF) . Morningstar thinks that the Strengthening the Tenth Amendment Through Entrusting States Act - or STATES Act -- has the most promise, since it has the most bipartisan support.

But this legislation would not legalize cannabis at the federal level, it would only prevent the federal government from interfering with states that have legalized the drug.

More Cannabis-Infused Fun on Way

Morningstar believes there will be significant growth in infused edibles and drink products. The publication sites investments from Constellation Brands (STZ) in Canopy Growth and Anheuser-Busch InBev's (BUD) investment in Tilray. The analysts think that edibles and infused drinks will attract new cannabis consumers that have previously shied away from consuming cannabis.

It's a Miracle: Sober Cannabis Exposure

Of all the ancillary companies now trading in the public markets, Morningstar seemed to play it safe by choosing Scotts Miracle-Gro (SMG) , which only has a three-star rating. While the company is mostly known for its traditional market fertilizers, it has also invested heavily in the hydroponic supply side of its business. The analysts said that they expect 40% of the company profits will come from cannabis by 2028.

"The company holds an estimated market share of 40% to 50% for hydroponic growing equipment," it read.

Smaller World, After All: Consolidation to Continue

The analysts pointed out that venture capitalists are pouring money into the cannabis market with the assumption it will eventually be legalized.

"In just six years, the amount of private capital committed to U.S. cannabis companies has increased a staggering 64 times -- and that's without many conventional exit routes for venture capitalists in sight," said the analysts.

The analysts believe cannabis-related consulting, software and other ancillary companies will become acquisition targets. Lab and strain testing companies could also be attractive.

The average merger and acquisition deal in cannabis has risen to $21.9 million in 2018. Exit transactions have hit record levels, according to Morningstar, having surpassed $2 billion and while that sounds impressive, it pales in comparison to other industries.

"There's a disconnect, then between industry excitement and exit numbers, which won't shoot through the roof without federal legalization," said the publication. 

There doesn't seem to be any doubt among the Morningstar analysts that this industry remains in its early days with huge growth ahead. The question seems to be whether today's current cannabis companies can seize opportunities.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Debra Borchardt had no position in the securities mentioned.  

TAGS: Investing | Stocks | Cannabis

More from Stocks

Here's Your Window Into Home Depot

Ed Ponsi
Dec 12, 2019 8:30 AM EST

This hardware store chain has been in decline, but still has room to build up.

The Way of the Fed, Liking and Trading Lululemon: Market Recon

Stephen Guilfoyle
Dec 12, 2019 8:13 AM EST

The Fed doesn't know what will happen, and they most certainly don't know what they will do in response when the worm does indeed turn.

Tariff News Should Hit Today but Don't Count on Clarity

James "Rev Shark" DePorre
Dec 12, 2019 7:41 AM EST

The market response will not be as simple as 'up on good news and down on bad news.'

Design a Good Trade With This Fashion Brand

Paul Price
Dec 12, 2019 7:00 AM EST

Designer Brands fell sharply this week and now it's a bargain for investors.

All the Fed Cares About Is Jumpstarting Inflation

Maleeha Bengali
Dec 12, 2019 6:55 AM EST

Inflation will be a big theme for 2020 and commodities will benefit the most -- especially copper and iron-ore.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 08:20 AM EST BOB LANG

    Webinar Time - Talkin' Calendars, Butterflys

    join me later today after the market close as we t...
  • 10:55 AM EST BOB LANG

    Strength in Semis and Banks

    Seeing some really good power in the semis today a...
  • 09:16 AM EST CHRIS VERSACE

    Dual Dividend Gift

    Coming up soon on Real Money Pro.
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2019 TheStreet, Inc., 14 Wall Street, 15th Fl, NY, NY 10005

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login