3 Low-Risk Plays for Federal Marijuana Legalization in the U.S.

Investors have developed a considerable interest in marijuana stocks. As U.S. marijuana legalization initiatives gain momentum, this interest grows. The size of the market and Americans’ penchant for consumption make the investment opportunity extremely attractive.

While there are hundreds of U.S. cannabis companies, they are severely limited in the financial services they can access, including tapping into U.S. capital markets. This stems directly from marijuana’s Schedule I designation. Under U.S. federal law, cannabis is classified in the same manner as hard drugs such as heroin, cocaine, or ecstasy.

However, U.S. companies are still trying to secure capital from investors by trading on the OTC markets as well as Canadian exchanges, where marijuana is federally legal. But investors should note that not all companies benefiting from the rapid growth of the marijuana market are classified as federally illegal.

There are a number of companies that have positioned themselves to capture the substantial benefits from the burgeoning industry. We’ve highlighted some of the top names for your consideration.

The Play

By their nature, these are companies that do not compete directly with marijuana producers, retailers, or brands. They often work side-by-side with the main industry players, providing them with services and supplies required to operate but do not touch the plant themselves.

These auxiliary companies bare less risk relative to their marijuana-touching peers. They are not as dependent on marijuana legalization for growth and they are not as likely to face legal action from overzealous policing.

They are also able to build out solid infrastructure across the entire country. This includes the integration of financial services and effective supply chain management.

For example, due to marijuana restrictions, state-to-state transfer of cannabis is considered drug trafficking. This forces all marijuana markets to operate as one-state operations.

The competition is also far less stiff. These companies are not required to grow at the same rate to appease investors. This means they can focus on growing responsibly and generating profits. This in itself is novel, where only a few companies have made this a priority (e.g. Trulieve, Liberty Health).

While there are a number of CBD-focused companies, we have excluded them from consideration as they will not see the same benefits from federal legalization.

The following three U.S. listed equities have positioned themselves for potential gains as the U.S. marijuana industry continues its expansion.

The Companies

Innovative Industrial Properties (IIPR)

Innovative Industrial Properties  is technically not a marijuana company, but a real estate investment trust (REIT). It is the only REIT of its kind that provides real estate and facilities designed for the growing of cannabis. The fact that it does not process or sell weed insulates them from Schedule I. Moreover, since they can also serve both hemp and medical marijuana growers, they could theoretically operate in all 50 states.

IIPR stock differs from most other marijuana stocks in another way—it earns a profit and pays dividends. In fact, it has also expanded by buying properties from struggling marijuana companies, which it then leases back.

IIPR also will benefit from the industry’s massive growth. Analysts forecast earnings growth of 140.0% this year. They also expect triple-digit profit increases in fiscal 2020 when they predict a 106.7% increase. Since REITs have to pay out at least 90% of their net income in dividends, that cash will come right back to investors. Currently, the company pays $3.12 per share in annual payouts, a yield of about 3.8%. At a forward P/E ratio of just over 22, IIPR stock is an intriguing way to not only play marijuana growth but also to earn cash flow as well.

The Scotts Miracle-Gro Company (SMG)

Most consumers know Scotts Miracle-Gro  best for their lawn fertilizer. However, the Marysville, Ohio-based lawn chemical company has become an emerging player in the marijuana industry. Through a division called Hawthorne Gardening Co., Scotts provides lighting, nutrients, hardware, and other products designed for growing cannabis. Hawthorne works with both hobbyists and commercial growers.

With its recent growth, Scotts may soon become a cannabis rather than a fertilizer company in the minds of consumers.

In the fourth-quarter, Hawthorne increased its sales by 38%, driven mostly by growth in the U.S. Hawthorne also accounted for $210 million of the Scotts Miracle-Gro’s $497.7 million in sales. With that kind of growth, Scotts may soon become a cannabis rather than a fertilizer company in the minds of consumers.

SMG stock also offers a safer, lower-cost segue into the cannabis industry. Thanks to marijuana, the company registers double-digit profit growth, with a 12.8% earnings increase predicted for the year. Moreover, it trades at less than 1.9 times sales.

Hence, the massive drop that hit other weed stocks left SMG mostly unscathed. At about $107 per share as of the time of this writing, it trades about 7% below the 52-week high of $114.63 per share. For investors wanting marijuana-driven growth without exposure to either wild stock price swings or Schedule I, SMG stock should serve them well.

GW Pharmaceuticals (GWPH)

While GW Pharmaceuticals is based in the UK, they currently sell the only FDA-approved product based on cannabis and derive the majority of their revenue in the U.S.

GW Pharma has made a name for itself selling Epidyolex, a marijuana-based treatment for epilepsy that received FDA approval in 2018. Since approval, more than 15,000 patients have tried the cannabis-based therapy. In the third quarter, Epidyolex brought in $86.1 million in revenue, with about 3,000 additional patients beginning treatment during the third quarter alone.

Thanks to the approval of this drug, analysts expect revenue to rise from just $15.88 million last year to $302.09 million in 2019. They forecast a further increase in revenue to $559.04 million in 2020. Moreover, profitability could come as early as next year.

Like many marijuana stocks, GWPH stock has fallen into a bear market in the spring and summer. As a result, it has fallen about 45% from its 52-week high. However, this has taken the price-to-sales ratio to about 15, well below the near-100 levels it had reached in the spring. With massive revenue growth driven by an FDA-approved product, GWPH should emerge as a long-term winner in the medical marijuana space.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Will Healy
Will Healy is a freelance business and financial writer based in the Dallas area. In addition to marijuana, energy, and mining stocks, he has also written about real estate, insurance, personal finance, and macroeconomics. In addition to Capital 10X, his articles have appeared on sites such as InvestorPlace, Yahoo! Finance, MSN Money, Kiplinger’s Personal Finance, GOBankingRates, and Seeking Alpha. Will holds a B.S. in Journalism from Texas A&M University, an M.S. in Geography from the University of North Texas, and an MBA from the University of Texas at Dallas. Phone: 416-721-8257. Address: 682 Indian Road Toronto, Ontario M6P 2C9.

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