Marijuana investors have seen a massive erosion in wealth over the last 12 months. The companies in the cannabis sector were expected to consolidate sales in a high-growth market. Instead, they were affected by lower-than-expected growth, high inventory levels, regulatory issues, health concerns arising from the use of vaping products, and more.
The relaxation in marijuana laws will no doubt benefit the entire cannabis industry. Several vertically integrated multi-state operators will pounce on the opportunity to drive sales and expand market share. Marijuana for recreational use was legalized north of the border in October 2018. However, in the U.S., cannabis consumption is still illegal at the federal level.
This is expected to change in the coming months, of course, after the COVID-19 threat subsides and governments can refocus on other economic priorities. As of April 14, marijuana is fully legal in 12 states in the U.S. According to Fool contributor Sean Williams, regions such as New Jersey and Arizona might legalize recreational use of cannabis, while Nebraska might give the go-ahead for medical marijuana in the upcoming months.
Here we look at three cannabis stocks that are well poised to benefit from the statewide legalization of medical and recreational marijuana products.
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A top cannabis supplier
Scotts Miracle-Gro (SMG 0.57%) is not a pure-play marijuana player. It is well known as a leader in the lawn care and home improvement segments in the U.S. Over the last few years, SMG has managed to leverage its legacy operations to enter the high-growth marijuana space.
SMG is not a licensed marijuana producer. Instead, the company supplies hydroponic gear via its Hawthorne business, which was established in 2014. This segment is focused on hydroponic growth and aims to build a solid portfolio by acquiring companies in the nutrients, ventilation, and lighting verticals, which are essential for indoor gardening.
These services are used by both legal and illegal marijuana growers that need hydroponic equipment. Acquisition-driven growth resulted in a 95% sales uptick for SMG's Hawthorne business in fiscal 2019. In the December quarter, Hawthorne sales were up 41% year over year at $198.8 million and accounted for 54.3% of total sales.
SMG has not looked to build a portfolio from scratch to serve the growing marijuana industry. It has instead relied on acquisitions to gain traction. These acquisitions were funded by debt, and a less than impressive balance sheet drove the stock lower by 43% in 2018.
As marijuana legalization continues to gain pace, SMG will be one of the top beneficiaries, which will help the company drive top line in the upcoming decade.
A profitable cannabis player
One of the top stocks in the cannabis space is Canada-based Aphria Inc. (APHA). It has managed to record a profit in two of the last three quarters at a time when most peers are struggling with mounting losses and declining cash balances. In the quarter ended in November 2020, it reported sales of CA$120.6 million, compared to sales of CA$126.11 million in the August quarter.
The company's acquisition of CC Pharma helped Aphria establish a robust distribution network in Europe's huge medical marijuana market. Aphria's press release states, "Through the acquisition of CC Pharma, the company obtained a leading importer and distributor of EU-pharmaceuticals for the German market."
It added, "With over 317 active German national pharmaceutical licences, 690 active EU pharmaceutical licences, and access to approximately 13,000 active pharmacy accounts, CC Pharma operates a production, repackaging and labelling facility."
Distribution revenue in the first two quarters of fiscal 2020 stood at CA$181.8 million, or 74% of total sales. Aphria will be able to leverage its huge distribution network and massive production facilities to take advantage of marijuana legalization in the U.S.
Aphria is already one of the top marijuana producers in the world, with three licensed facilities and a production capacity of 255,000 kilograms per year.
A cannabis real estate play
Another ancillary cannabis player is Innovative Industrial Properties (IIPR -1.45%). This company is a marijuana-focused real estate investment trust. We know that cannabis is still illegal in several states, which makes it difficult for licensed producers to raise debt capital for expansion and growth. IIPR solves this problem with its sale-leaseback business model.
IIPR acquires properties from cannabis companies and leases them back to generate revenue, which also reduces capital expenditure for marijuana producers. As of April 2, IIPR owns 54 properties totaling close to four million square feet in rentable space. With a weighted average lease term of 16.1 years, IIPR should ensure a steady stream of cash flows even during an economic downturn.
Some of IIPR's tenants are large cannabis players, including Cresco Labs, Curaleaf, and Trulieve. As marijuana laws will continue to be amended, demand for IIPR's real estate services is bound to increase, making it one of the safest bets in the sector. What makes the stock more attractive is its high dividend yield of 5.5%.
The cannabis industry is still at a nascent stage. According to a report from Research and Markets, the North American legal marijuana market is estimated to grow at an annual rate of 15.7% between 2018 and 2025 to reach $36.2 billion. This growth should drive revenue of several pot companies as the product is decriminalized in other states.
