Cannabis Industry Seeing Growing Interest
TD Ameritrade [August 23, 2019]
It wasn’t so long ago that publicly traded companies shied away from investing in the nascent marijuana industry, even as California and Colorado began the legalization trend.
Times have quickly changed. While cannabis remains illegal on the federal level, 10 states have fully legalized marijuana, and many others have moved to decriminalize the crop. However, it’s fully illegal in 12 states, and many other states only allow cannabis for medicinal purposes.
But, with Canada having legalized cannabis nationwide, and with attitudes toward the drug seeming to be softening, more industries are cropping up to support the growing sector. Here are some ideas on how to invest in the cannabis industry.
James Boyd, education coach at TD Ameritrade, pointed out some Canadian publicly traded cannabis-related companies now have dual listings on the New York Stock Exchange™ and Nasdaq™. He cited a Fortune report attributed to cannabis-industry advisory firm Viridian Capital Advisors that stated cannabis-related companies raised almost $13.8 billion in 2018 versus $3.5 billion in 2017.
That kind of growth may just be the beginning, Boyd remarked.
The big news stories around the industry center on consuming companies, such as the 2018 news that beer and spirits maker Constellation Brands Inc (NYSE: STZ) increased its investment in Canadian medical-cannabis producer Canopy Growth Corp (NYSE: CGC) to 38%. Constellation said at the time it expected cannabis to be legal in the United States. Another beer maker, Molson Coors Brewing (NYSE: TAP) has a 57.5% ownership in Canadian cannabis maker HEXO Corp (NYSE: HEXO) to make non-alcoholic, cannabis-infused drinks in Canada.
Green Gold Rush
You can also invest in the cannabis industry through ancillary companies, which help the industry run smoothly by improving production or participating in the supply chain. Think of it this way: During the California Gold Rush, there were companies that sold the picks and shovels to miners. Ancillary cannabis companies are part of the “green” rush.
One of the biggest companies on that front is Scotts Miracle-Gro Co (NYSE: SMG), best known for fertilizer and lawn care products. The company provides supplies needed to grow cannabis, from soil and fertilizer to growing systems and lights and everything in between. Growing cannabis indoors on a small scale can be notoriously costly in energy. A recent study by researcher Evan Mills estimated indoor cannabis growers use at least 1% of total U.S. power. As the legal industry leafs out, growers may be looking to professionalize by using greenhouses and becoming more energy efficient.
Growing: Greenhouses and Hydroponics
Another bigger company in the greenhouse sector is Innovative Industrial Properties Inc (NYSE: IIPR), which leases land to cannabis growers without the means to buy land or greenhouses. IIPR acquires, owns, and manages industrial properties, including facilities it leases to experienced, state-licensed operators who grow cannabis for medical use.
Hydroponic supply retailer GrowGeneration Corp. is another firm in the indoor farming space. Based in Pueblo, Colorado, it offers hydroponic equipment, power-efficient lighting, plant nutrients, and other products used by specialty growers.
Packaging and Distribution
A number of newer, smaller companies are also growing in this ancillary space.
As use increases, growers will need more efficient packaging and supplies to scale up. California-based KushCo Holdings makes packaging that complies with regulations for both medical and recreational cannabis.
Denver-based supply chain management firm Helix TCS helps its clients track cannabis sales. It also helps companies stay in compliance and offer asset protection, making them a “seed-to-sale” service provider.
Cannabis must be dry to be shipped, and Vancouver-based Enwave has a dehydration technology that’s used in food and pharmaceutical industries as well as for cannabis.
Finance and Administration
Because cannabis remains federally illegal, firms in the sector have encountered hurdles to using traditional banks. Auxly Cannabis Group offers investment, financial, and banking solutions for cannabis producers and retailers. While it also operates in other fields, the firm specializes in providing equity and debt investments to private and public cannabis firms.
MariMed takes the headache out of back-office work for cannabis companies with legal, accounting, human resources, and other corporate and administrative services.
Portfolio Considerations: Weeding Out the Candidates
These are heady times for the cannabis industry as legalization takes hold in more U.S. states. But as Boyd explained, investors still need to be cautious. Almost all of these companies are new and have short track records. And except for Scotts Miracle-Gro and Innovative Industrial Properties, the rest trade either over-the-counter or on the pink sheets.
These companies’ stocks also trade for less than $10 per share, something to consider, he noted. Many new cannabis companies have share prices in the penny-stock range.
“If I see something that is less than $10, it tells me there isn’t institutional investment in it, or prices would be higher. There’s also not a lot of analyst coverage on these companies yet,” Boyd said. “But if these get bigger, then more analysts will cover them, and the accuracy of the companies’ forecasts will become better, too.”