7 Indirect Stock Plays on the Cannabis Sector

Can you gain exposure to the high-flying cannabis industry without taking on undue risks? Several contributors to MoneyShow.com have chosen cannabis-related stocks that primarily operate in other established businesses. Hilary Kramer, GameChangers While the big cannabis growers are highly speculative, companies that have incorporated cannabis into an existing business plans can be more stable. For them, cannabis is not an all-or-nothing bet. Instead, it is a little extra sizzle. While these are not cannabis stocks properly speaking, these companies use cannabis as a catalyst that will take them (and shareholders) to the next level by making their business more vibrant and keeping them relevant. Legal cannabis is becoming a mature industry as next-generation growers and processors have begun to create value-added and differentiated products. Think of the global beer and tobacco companies, which are always eager to add the hot new legal flavor to their product lines. Think of Big Pharma, which is hoping to use cannabis derivatives as the basis for curing epilepsy and other diseases of the central nervous system. PerkinElmer is a great example of an established company, founded in 1937, tentatively embracing a slice of the cannabis boom. It wants the SEC to know that its food testing systems can also analyze cannabis, keeping heavily regulated companies on top of their compliance obligations. Is that a small nudge? Yes. But this can become a vibrant new market (easily $1 billion a year worldwide) for this otherwise mature business to capture. Color me intrigued. James River Group Holdings Ltd. hid a reference to various types of businesses engaged in the medical and adult-use cannabis industry in its latest quarterly report. Without my proprietary screens, you would've literally blinked and missed it. But with so many cannabis players in dire need of insurance coverage, this is a blue-sky opportunity. The James River underwriters treat this as any other life science business, such as nutraceuticals or vaccines. They know the risk factors and how to price them. Intec Pharma Ltd. is one of those life science companies. We've known for some time that it is eager to develop non-addictive cannabis-derived painkillers. Now, we know that the pills that Intec has developed can successfully deliver the right molecules in a controlled release format. An oral spray, on the other hand, needs a little more work. Will either application method make it to the Food and Drug Administration approval stage? We'll just have to see, but with the stock starting to move wild, it's clear Wall Street is already catching on. Brit Ryle, The Wealth Advisory While not a pure play, Scotts Miracle-Gro is a cannabis investment that I believe has a ton of potential in the long run. The stock had a rough year in 2018. Shares were up as high as $108.61 in January. And they cratered to under $60 by December. Much of that drop was in January after the company reported dismal earnings. And things didn't get any better, as shares continued to stumble and management continued to temper future expectations. But things are starting to look a lot better at Scotts now. Since those December lows, shares are up over 30%. Scotts reported a loss in January. But as a seasonal business that focuses on lawn and gardens in the Northern Hemisphere, that's completely expected. What wasn't expected was the incredible revenue growth from the cannabis-directed Hawthorne Gardens unit. That jumped 84% from last year. And it eased investors' fears that Scotts had grown too quickly. It shows that Scotts was able to bring scale to the hydroponic nutrient business. And now that it's achieved scale, it can start cutting costs. That's one of the reasons management and analysts are so cheery about the future at Scotts. Earnings are expected to grow at over 20% annually for the next several years. That's well above industry averages. And it makes Scotts a new growth story. If you were to base Scotts' current value on the value of those future cash flows, you'd be willing to pay over $200 per share. But you can get them for just $80 right now. I'm not saying Scotts is going to shoot to $200 a share. But it was a $100 a share company about a year ago. And it'll be back there in less time. It's already the main supplier for hydroponic nutrients for the U.S. cannabis industry. And once that industry goes nationwide, revenues are going to go off the charts. But it'll be folks like us, who were buying while shares were down and nobody had any love for this loser, that get rewarded when that happens. Everyone who waits is going to be buying our shares and cementing our profits. Nick Hodge, Wall Street's Underground Profits Constellation Brands is not being assigned the proper value considering it owns a third of world-leading cannabis company Canopy Growth , and can buy more shares to take a majority stake. This alone is currently worth US$8-$10 billion. Yet Constellation shares remain at the low end of their 52-week range. They are a buy. Credit Suisse agrees that these shares are cheap. The research firm is out with a report that commenced coverage on the company with an outperform rating and price target of US$230. Credit Suisse noted it's trading with a P/E multiple that's fallen to a five-year low and that it trades at a 20% discount to its peers. I'd note its peers don't own half of the largest cannabis company in the world. The stock remains below our recommended buy-under price of US$175 per share. Ben Reynolds, Sure Dividend Altria is one of the largest tobacco companies in the world. Altria produces and sells cigarettes under the Marlboro brand in the U.S. The company sells several other cigarette brands, cigar brands, and non-smokeable tobacco products to round out the company's product portfolio. In addition, Altria owns a 10% stake in Anheuser-Busch InBev , which is one of the world's largest beer companies. As a tobacco company, Altria is primed for an expansion into the marijuana space, which is why the company has taken a stake in Canadian marijuana company Cronos Group . In December Altria agreed to pay $1.8 billion for a 45% stake in Cronos. Additionally Altria has an option to acquire another 10% at a slightly higher valuation. Compared to Altria's market capitalization of $98 billion this is not an overly large stake, but it provides an entry into this potentially large market. In case marijuana gets legalized in the U.S. on a federal level, Altria could likely expand into this space very fast thanks to the know-how that the company acquires through its stake in Cronos. Altria is highly profitable, trades at just 11.8 times 2019's earnings, and offers a hefty dividend yield of 6.3%, which makes it a high dividend stock. This makes Altria a compelling pick for investors that seek an income investment with some potential upside through a side-venture in the marijuana space. Altria is our favorite stock for indirect exposure to the marijuana sector for its mix of high income, solid total returns, and strong marijuana industry potential. Molson Coors comes in a close second to Altria. It is a beverage company that is focused on the global beer market. Molson Coors has a potentially large growth runway with marijuana-based beverages and also has solid total return potential. Based in Denver, CO, the firm has moved into the marijuana industry through a joint venture with Hydropothecary, a Canada-based marijuana producer. The joint venture will focus on producing marijuana-containing, but alcohol-free beverages. The first market that the joint venture will address is the Canadian market, but it is likely that the company would expand globally if legalization in other countries allows for an entry into these markets. Due to Molson Coors' existing global sales networks it is likely that it would be able to capture significant market share in overseas markets if the opportunity arises. Molson Coors is trading at a relatively inexpensive valuation of just 11.9 times next year's earnings, and investors get paid an above-average dividend yield of 2.8%.

7 Indirect Stock Plays on the Cannabis Sector

Investors can gain exposure to the high-flying cannabis industry without taking on undue risks.

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