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Dividend Investing Ideas Center
Sam Bourgi Oct 05, 2017
Very few industries have captured the imagination of Wall Street quite like cannabis. With pro-marijuana legislation sweeping the continent, many investors believe they are in the shadow of a once-in-a-lifetime opportunity to capitalize on a budding industry with decades of pent-up demand.
Marijuana represents a highly diverse cross-section of North American business that goes far beyond local grow ops. It cuts across the medical, consumer goods and lifestyle industries, giving investors plenty of opportunities to diversify. The industry is also undergoing a profound shift following a series of watershed moments on both sides of the North American border.
Seven U.S. states voted to legalize recreational marijuana last November, including California, a state with the potential to become the epicenter of the industry. North of the border, the Canadian government has publicly announced the full legalization of recreational weed on July 1, 2018, some 17 years after it sanctioned the use of medical marijuana.
These major shifts in public policy have left cannabis stocks seeing green, leading to an outpour of support from both Wall Street and Main Street. But before investors get high off marijuana stocks, it’s critical to get educated about the industry and its projected growth rate. It’s equally important to consider the sharp divergence between state and federal laws impacting cannabis consumption.
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The North American marijuana market is scaling up at a rapid pace. The industry generated $6.7 billion in revenue in 2016, up 30% from the year before, according to Arcview Market Research. The market is expected to grow at a compound annual growth rate (CAGR) of 25% through 2021.
To put that in perspective, the only consumer categories to post similar numbers after reaching $5 billion in annual spending are cable television in the 1990s and broadband internet in the 2000s. Clearly, marijuana is big business.
Within marijuana investments, pharmaceuticals and biotechnology companies are by far the most stable.
Until now, they’ve offered investors the biggest bang for their buck. This is largely due to favorable regulation surrounding medical cannabis research and consumption.
Pharmaceuticals and biotechs are on the leading edge of cannabis and cannabinoid treatments. The medical marijuana field already comprises several big players, including GW Pharmaceuticals and Insys Therapeutics.
Legalization and growing public acceptance of cannabis will be a huge tailwind for these and other marijuana companies. The North American Marijuana Index already features over 300 companies that are well poised to capitalize on the shift in public policy. These companies represent a myriad of industries, including biotechnology, agri-tech, cultivation and retail, secondary services and tech and media, among others.
Interested in exploring other vice stocks? Click here to look at Altria (MO ), a leading cigarette company. Also, be sure to read Why Tobacco Stocks Can Make Good Dividend Investments.
Investors looking to gain exposure to the marijuana industry can start with AbbVie Inc. (ABBV ) and Scotts Miracle-Gro Co. (SMG ). These companies provide both direct and indirect exposure to the green plant.
AbbVie is one of marijuana’s most promising investments. The multibillion-dollar Chicago-based drug manufacturer has successfully commercialized marijuana-based drugs. This includes the FDA-approved Marinol, which helps alleviate nausea during chemotherapy treatments. Marinol is also used by AIDS patients to restore appetite.
ABBV is a strong dividend payer, and one of the marijuana industry’s most promising prospects. That’s because, as a diversified drug manufacturer, ABBV is not solely dependent on marijuana treatment, but stands to benefit greatly from increased legalization. Unlike most pharmaceuticals, ABBV operates almost exclusively in the United States. This puts revenue, earnings and share prices at risk in the event of a domestic downturn. However, the company is unlikely to be adversely affected by the debate over recreational marijuana, given its focus on medical cannabis.
Scotts Miracle-Gro is a leading provider of lawn and garden care products that is betting big on marijuana growers. SMG offers indirect exposure to the marijuana industry by providing specialty fertilizer and pesticides to grow ops.
Scotts’ share price exploded following the 2016 legalization campaign, a sign that investors are excited about the company’s prospects post-legalization. With more than a dozen brands, SMG has developed a core domestic market that is able to withstand the shocks of the turbulent marijuana sector. Scotts boasts an attractive yield and has been in business for some 150 years.
SMG is expected to benefit greatly from legalization of recreational weed, but an uncertain regulatory landscape may lead to a rocky share price in the medium term. The stock is a good one to watch until the Trump administration clarifies its position on recreational marijuana.
Looking to build a diversified portfolio? Learn about Socially Responsible Investing.
Marijuana stocks are part of a broader sin bin known as vice stocks, which includes cigarette and alcohol manufacturers as well as casinos and resorts. Marijuana is perhaps the most intriguing, given the recent regulatory changes taking place. This has given birth to a new investor high in the form of marijuana ETFs, with the likes of Horizons entering the market. Whether you plan to blaze on marijuana stocks or not, it’s a good idea to keep pace of this uncharted industry.
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