The marijuana industry recently put the finishing touches on what was its most defining year ever. In 2018, Canada became the first industrialized country in the world, and only the second country overall behind Uruguay, to legalize recreational cannabis. In doing so, Canada opened the door to billions of dollars in added annual sales and, more importantly, declared the legal pot industry a legitimate business model.
However, major advancements happened in the U.S., too. Two more states legalized medical pot (Utah and Missouri), which increased the number of states to have legalized cannabis in some capacity to 32. We also saw the green light given to adult-use pot in two states (Vermont and Michigan), raising the number of recreational marijuana states to 10. And let’s not forget that the U.S. Food and Drug Administration approved its first cannabis-derived drug, and President Trump signed the Farm Bill into law, thereby legalizing hemp and hemp-based cannabidiol (CBD), the nonpsychoactive cannabinoid best known for its perceived medical benefits.
It was a good year throughout North America, but the truth of the matter is that the U.S. offers the greater long-term opportunity. If the U.S. federal government were to change its tune on marijuana, the U.S. weed market would leave Canada in the dust. That’s what makes U.S. pot stocks so intriguing in the upcoming year. If you’re looking for ways to gain exposure to the U.S. cannabis industry, the following five stocks may one day make you rich.
Even though it’s headquartered in Canada, all the excitement surrounding Origin House (NASDAQOTH:ORHOF), which was previously known as CannaRoyalty, is based on the California market.
Whereas most of the focus is on cannabis growers in California — and rightly so considering that sales in the Golden State alone could top all of Canada —Â Origin House finds itself in a unique niche in the fast-growing market. With potentially thousands of products competing for shelf space in hundreds of dispensaries, Origin House will be among the very few licensed distributors in the California cannabis supply chain. With little competition and seemingly guaranteed cash flow, Origin House has been actively acquiring distribution companies. As oversupply issues and regulatory red tape regarding dispensary approvals naturally work themselves out over the next 12 to 24 months, Origin House should see its revenue and distribution market share soar.
The company has also worked into other areas of the California supply chain via acquisition. Just a month ago it purchased cannabis cultivator Cub City for just over $7 million, giving it access to 1,400 kilograms of premium dried cannabis per year, along with Cub City’s proprietary production techniques.Â
Although profitability isn’t expected in 2019, investors with a long-term mind-set could do very well with Origin House.
KushCo’s primary business opportunity remains its packaging and branding solutions business. Although it’s a retailer of vaporizers — which could be a very good thing if Canada approves new consumption options by this coming summer — KushCo’s packaging business should become its bread and butter. With federal, state, and local laws potentially differing, KushCo is responsible for working with more than 5,000 marijuana growers around the world (including within the U.S.) to develop tamper- and child-resistant packaging that adheres to all applicable laws.
Furthermore, KushCo’s acquisition of Zack Darling Creative Associates gives it an inside edge to handle branding solutions and marketing, too. With branding often limited to a small area of packaging, KushCo can work with growers to develop a marketing solution that fits their needs and allows them to stand out.
KushCo’s acquisition of Summit Innovations should pay dividends, too. Summit is a supplier of hydrocarbon gases, which are crucial to the production of cannabis oils. These oils are a higher-price, higher-margin product than traditional dried cannabis. If and when dried flower oversupply does strike, growers will be turning to oil production in droves. In other words, KushCo is at the center of multiple fast-growing ancillary sales trends.
The vertically integrated dispensary industry in the U.S. is getting a lot of attention, and Trulieve Cannabis (NASDAQOTH:TCNNF) has arguably been the most impressive of all publicly traded dispensary operators in the early going.
Trulieve currently has 22 open dispensaries, all of which are located in the state of Florida. Florida could very well boast one of the most lucrative medical cannabis markets in the U.S. considering the large number of retirees within the state. Older Americans are more likely than younger folks to have ailments that medical cannabis can potentially treat, making Florida a good bet to eventually top $1 billion in medical pot sales. Since interstate cannabis transport isn’t allowed, per federal law, Trulieve also owns cultivation facilities within Florida, thereby controlling its supply chain.
Just how much of a giant is Trulieve in the Sunshine State? According to the company, it’s “consistently selling between 60% and 80% of the state’s overall volume.” As a reminder, Florida has only issued just over a dozen cultivation permits within the state, meaning Trulieve has a relatively small and defined amount of competition. Â
This is also one of a very small group of marijuana stocks to have generated an operating profit in the most recent quarter, without the assistance of one-time benefits and fair-value adjustments. With marijuana legal to our north, operating results actually matter now. Trulieve Cannabis is off to a great start and could keep up this momentum in 2019.
Another intriguing play in the U.S. market is Charlotte’s Web Holdings (NASDAQOTH:CWBHF), a provider of hemp-based CBD products to more than 3,000 retailers around the country.
As you can imagine, the passage of the Farm Bill could turn out to be a very big deal for Charlotte’s Web. Prior to its passage, CBD had been legalized in 32 states and was allowed in select scenarios in 14 others. Now, with the Farm Bill signed into law, hemp and hemp-derived CBD are perfectly legal. Mind you, CBD from the cannabis plant is still illicit according to federal law, but hemp-based products aren’t. Charlotte’s Web specializes in hemp-based CBD products, and the Farm Bill should provide the company an opportunity to get its products into a number of new retailers in 2019 and beyond.
Like Trulieve, Charlotte’s Web was also profitable in its most recent quarter. Despite rather “tame” year-on-year sales growth of 57%, the company recorded a $2.5 million profit. Excluding one-time adjustments, the company’s operating profit would have been $4 million. That’s fantastic prior to the passage of the Farm Bill. With hemp-based CBD no longer taboo, these sales figures and profitability should soar.Â
Last, but not least, investors might want to consider marijuana real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR).
The idea behind a REIT is to purchase land and/or facilities within a specific industry and then lease out these assets for an extended period of time, thereby reaping the benefits of rental income, and perhaps selling the assets down the road for a profit. In the case of Innovative Industrial Properties, it acquires medical cannabis greenhouses and leases them out for between 15 and 20 years at a time. To date, it’s purchased 11 properties spanning eight states.
The beauty of the REIT model for Innovative Industrial Properties is the predictable growth and cash flow. The company has built in annual rent increases of 3.25%, as well as management fees totaling 1.5% of total rent. This helps to ensure that the company always stays ahead of the inflationary curve.
Additionally — and you may notice a theme here — Innovative Industrial Properties is already profitable on a recurring basis. Investors may deal with share-based dilution as the company sells common stock to raise money for more acquisitions, but being healthfully profitable and a REIT means it’s paying out most of its adjusted funds from operations to shareholders as a dividend. Since going public just over two years ago, Innovative Industrial Properties has raised its dividend twice, and is currently yielding more than 3%.
Marijuana may not be legal at the federal level in the U.S., but opportunities abound for pot stock investors.