Marijuana is becoming big business in 2019. Up until now, full-scale legalization of cannabis has been largely limited to international countries. One of the most notable pieces of news to move the marijuana market in 2018 was Canada lifting their prohibition on marijuana in October.
Since then, a mid-term election in the United States brought legalized recreational use for marijuana to additional states. And even more, states have legalized marijuana for medicinal purposes.
If you’re a retail investor, cannabis stocks may look like a speculative bubble that’s bound to burst. You may even be put off by the prospect of owning marijuana stocks. However, that doesn't have to be the case if you know what you're investing in. Rather than look at local hemp shops opening up the door for recreational users, look at the companies that are looking to find uses for cannabis in areas such as textiles and beverages. The idea of cannabis-infused energy drinks is not as far on the horizon as investors think. That means now is the critical time to look into the companies and stocks that are primed for a breakout. The companies that will thrive will have a quality product and high volume that will allow them to handle both the supply and demand side of the equation.
In this slide show, we’ll show you seven marijuana stocks that you shouldn’t ignore in 2019. These stocks run the gamut from the producer stocks (for those looking for a pure cannabis play), to “picks and shovel” and biopharma stocks that give investors a back door into pharma stocks.
Canopy Growth (NYSE: CGC) - One of the key reasons to own Canopy Growth is that Constellation Brands owns 38% of the company, and they have aggressive plans for CGC. Although the company has sales that are just below $100 million, Constellation says that it has plans for the company to achieve $1 billion in sales in the next 18 months. Some might hear a forecast like that and think that Constellation might be sampling some of Canopy’s product, but the fundamentals support the aggressive forecast. Canopy Growth is the largest marijuana company in Canada which, between medicinal and recreational marijuana use will total nearly $5 billion dollars. The company already has 30% of the medicinal marijuana market, and it’s not hard to imagine that Canopy can also grab a high percentage of the recreational market which would put the company well on its way to reaching that $1 billion level. And all of this does not count the additional revenue the country may generate from growing sales in Germany and, potentially, the United States.
Ratings Breakdown: 7 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
Tilray (NASDAQ: TLRY) - Tilray is a Canadian producer that just went public a few months ago. And while there are some analysts that are wary about valuation (TLRY is currently trading at around 500x sales), it has a business model that might actually make it a better pure play than Canopy. Tilray is the second largest cannabis company in terms of market cap and is already an established medicinal marijuana producer in 10 countries. And it has an existing partnership with pharmaceutical provider Novartis and is aggressively trying to make moves into the recreational space by potentially partnering with major beverage companies. But there’s still that valuation problem. The short-selling firm, Citron Research gave TLRY a $45 price target in August 2018. Currently, it trades around $100 per share and recently jumped 20% in a single day on news that private equity company, Privateer Holdings, would not be selling their shares in the first half of this year.
Tilray, Inc. engages in the research, cultivation, processing, and distribution of medical cannabis. The company offers its products in Argentina, Australia, Canada, Chile, Croatia, Cyprus, the Czech Republic, Germany, New Zealand, and South Africa. Tilray, Inc. is headquartered in Nanaimo, Canada.
Ratings Breakdown: 3 Buy Ratings, 3 Hold Ratings, 3 Sell Ratings.
GW Pharmaceuticals (NASDAQ: GWPH) - GW Pharmaceuticals is an example of how to make money from the marijuana boom without playing a pure cannabis stock. GWPH is a biopharmaceutical company that already has a product derived from cannabinoids – the chemical compounds produced by cannabis flowers that help to provide relief for various symptoms. In the case of GWPH, their products Epidiolex (to treat epilepsy) and Sativex (spasticity related to MS) are already in the pipeline. As marijuana becomes more acceptable, their products are expected to gain higher acceptance. Even consumers who may see marijuana as evil may come to recognize these drugs as a “necessary evil” and a helpful way to manage symptoms. However, investors should be prepared to exercise patience when investing in GW Pharmaceuticals. Like other early-stage drug companies, they have yet to show a profit. And with regulatory hurdles to clear, profitability may be elusive for several years. However, for investors willing to wait it out, GWPH has the potential to be a great buy-and-hold stock.
GW Pharmaceuticals plc, a biopharmaceutical company, focuses on discovering, developing, and commercializing cannabinoid prescription medicines using botanical extracts derived from the Cannabis plant. Its lead product is Epidiolex, an oral medicine for the treatment of refractory childhood epilepsies, as well as for the treatment of Dravet syndrome, Lennox-Gastaut syndrome, tuberous sclerosis complex, and infantile spasms. The company also develops and markets Sativex, an oromucosal spray for the treatment of spasticity due to multiple sclerosis. In addition, it develops various product candidates for the treatment of glioblastoma, neonatal hypoxic-ischemic encephalopathy, and schizophrenia. Further, the company has license and development agreements with Almirall S.A.; Bayer HealthCare AG; Ipsen Biopharm Ltd; and Neopharm Group. It primarily operates in Europe, the United Kingdom, the United States, Canada, and Asia. GW Pharmaceuticals plc was founded in 1998 and is based in Cambridge, the United Kingdom.
Scotts Miracle-Gro (NYSE: SMG) - One of the back door ways to invest in marijuana is through a “picks and shovel” stock like Scotts Miracle-Gro. These stocks are cashing in on the booming growth of marijuana as an industry by providing companies with the means to grow and cultivate the plant. Scotts does this through a separate business unit, Hawthorne Gardening, which sells hydroponics, lighting, and related equipment to the cannabis industry. Their pending acquisition of Sunshine Supply will help the company accelerate Hawthorne’s growth and scale. The stock is not a pure cannabis play, and while not an inexpensive stock it is a value at 18X forward earnings-per-share, not to mention the opportunity to grab a 2.7% dividend yield. But investing in this stock will require patience. It dropped more than 60% in 2018, hitting its two-year low. And if you look specifically at Hawthorne, it suffered a 27% revenue drop if acquisitions are removed. With Hawthorne, Scotts is trying to operate a start-up inside a big company. This could be difficult as investors who want to invest in Scotts core business unit may be turned off by their foray into marijuana, and pure cannabis investors may find the stock to be less attractive than the leading players. Still, the stock certainly seems to be in oversold territory and any improvement in its core business should provide a lift to the stock.
The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products in the United States and internationally. The company operates through three segments: U.S. Consumer, Hawthorne, and Other. It offers lawn care products, such as lawn fertilizers, grass seed products, spreaders, other durable products, and outdoor cleaners, as well as lawn-related weed, pest, and disease control products. The company also provides gardening and landscape products, including water-soluble and continuous-release plant foods, potting mixes and garden soils, mulch and decorative groundcover products, plant-related pest and disease control products, organic garden products, and lives goods and seeding solutions. In addition, it offers hydroponic products that help users grow plants, flowers, and vegetables in an indoor or urban environment; and insect control products, rodent control products, and weed control products for home areas. The company offers its products under the Scotts, Turf Builder, EZ Seed, PatchMaster, Thick'R Lawn, GrubEx, EdgeGuard, Handy Green II, Scotts OxiCleanTM3, Miracle-Gro, LiquaFeed, Osmocote, Shake N Feed, Hyponex, Earthgro, SuperSoil, Fafard, Nature Scapes, Ortho, Miracle-Gro Organic Choice, Nature's Care, Whitney Farms, EcoScraps, Gro-ables, Hydroponics, Gavita, Botanicare, Vermicrop, Agrolux, Can-Filters, Sun System, Gro Pro, Mother Earth, Hurricane, Grower's Edge, AeroGarden, Ortho Weed B Gon, Roundup, and Groundclear brands. It serves home centers, mass merchandisers, warehouse clubs, large hardware chains, independent hardware stores, nurseries, garden centers, e-commerce platforms, food and drug stores, and indoor gardening and hydroponic distributors and retailers through a direct sales force, and network of brokers and distributors. The Scotts Miracle-Gro Company was founded in 1868 and is headquartered in Marysville, Ohio.
Ratings Breakdown: 1 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
Cara Therapeutics (NASDAQ: CARA) - Many analysts say that the way to have marijuana stocks become more widely accepted is by promoting its medicinal use. That is the mission of Cara Therapeutics and it made some significant strides in 2018 towards fulfilling that mission. The company found a partner in Vifor Fresenius Medical Care Renal Pharma Ltd (VFMCRP) that allows the company to market their Korsuva injection as a treatment for pruritis – a condition associated with chronic kidney disease. The product is making its way through trials and could be ready to put the drug into phase 2 studies early in 2019. Cara’s stock is currently trading around $16 per share, but analysts have given the stock a consensus buy rating and are forecasting the stock to hit a target near $27 per share – a nearly 89% increase from its current levels. Like many pharmaceutical companies, there are concerns that their pipeline of drugs could be several years away from becoming a viable contributor to Cara’s top and bottom line. However, someone has to be first. And if the trials go well, Cara will be a name to watch in the increasingly disruptive world of companies looking to capitalize on cannabis.
Cronos Group (NASDAQ: CRON) - Cronos is one of the more polarizing stocks among pure cannabis plays. Investors cheered the announcement that Altria was making a $1.8 billion investment in Cronos. This would give Altria a path to bring cannabis products to market at a time when it's hard to find innovation in the tobacco space. Cronos has also recently completed its 850,000-square foot GrowCo facility which will allow an annual output of 70,000 kilograms at full capacity. This will make the company one of the largest producers in Canada. And Cronos is trying to diversify its product portfolio that will allow them to develop yeast strains that may be capable of producing cannabinoids on a commercial scale. Cronos is not without risk. The company is not as well-known as its peers and with Canada legalizing marijuana for recreational use, the pressure will be on Cronos to show an actual profit, not just promises. Cronos has a significant amount of cash to work with so there’s little downside risk in the stock. The question for investors will be if you believe in the company’s potential valuation. Like a lot of things in the marijuana industry, that is unclear, but at less than $14 per share, the stock offers more upside than some other cannabis stocks.
Ratings Breakdown: 2 Buy Ratings, 4 Hold Ratings, 4 Sell Ratings.
Innovative Industrial Properties (NYSE: IIPR) - As demand grows for marijuana, companies will need places to grow the plant which has been known to grow … like a weed. That’s where Innovative Industrial Properties offers an advantage to investors looking for a different way to play the growing marijuana market. They offer cannabis companies an existing infrastructure in the form of climate-controlled greenhouses which provide more optimal growing conditions than marijuana that will be grown in the field. In fact, they are already providing their services for the medical marijuana industry. Since these facilities are already built, they have a leg up on the competition that will have to play catch up to capture the retail marijuana dollar. Another advantage IIPR has is that they have a presence in a number of states, which is a scale advantage over smaller players. Finally, the company is already profitable which means they are well positioned to deal with whatever regulations will be placed on the growing and cultivating of marijuana.
Ratings Breakdown: 2 Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.
Marijuana stocks are becoming, that’s right, becoming a big business. But right now many cannabis stocks are rewarding the companies as if they’ve arrived. Valuations, in general, are very high. But that’s to be expected. It’s an emerging industry with a massive upside. Millennial investors, a growing segment of the investing community, are flocking to the stocks. These investors are likely to be willing to hold onto these companies for the long haul because they are the target market for many of the beverage and textile products that will be developed in the recreational marijuana space. And these investors are also the true believers when it comes to medicinal marijuana.
Still, the market is still so very young. And there are good and bad companies. Investors need to pay attention to the size and scope of these companies. Right now, marijuana companies are popping up like weeds, but contraction is inevitable. When that happens, the companies that have the highest margins and highest prices will be the biggest winners.