This article was updated on Feb. 5, 2018, and originally published on May 29, 2017.
Chances are that investors would seriously struggle to find an industry with a higher long-term growth rate than legal marijuana. Regardless of the research firm, estimates for growth are off the charts.
Cannabis research firm ArcView pegged growth of legal North American weed at 34% last year to $6.9 billion, and it anticipates that sales of the drug could reach $22 billion by 2021. Even more recently, the Marijuana Business Factbook 2017 from Marijuana Business Daily predicts 45% growth in 2018 alone and a tripling in sales between 2017 and 2021.
There are two main factors behind this growth: public opinion and state revenue needs.
Over just 22 years, Gallup has seen support for legal weed more than double to an all-time high of 64% as of October 2017. As for select states, the desire to generate new sources of revenue has some legislators excited about legalizing recreational cannabis. In Colorado, for example, legal recreational and medical sales hit $1.49 billion in 2017, representing nearly 15% year-over-year growth. More importantly, tax and licensing revenue surpassed $247 million, with this money being funneled into the state's education budget, as well as to law enforcement and drug-abuse programs.
Traditional marijuana stocks are on fire
These incredible growth figures, and the expectation that marijuana will continue to be legalized at the state level despite inhibitive federal regulations, is what's drawn investors to marijuana stocks. A majority of larger marijuana stocks with a valuation of $200 million or higher have risen by at least 100% over the past 12 months, leaving the broader market and most industries in the dust.
Traditional marijuana players have been among the biggest beneficiaries. For instance, Canopy Growth Corp. (NASDAQOTH:TWMJF), one of Canada's largest medical cannabis players, and currently the largest pot stock by market cap, has increased in value by more than 115% over the trailing 12-month period.
After years of losses, Canopy Growth is on track to be profitable by 2019 as demand for cannabis products and oils increases. Even more important is legislation working its way through Canada's Parliament that could legalize recreational marijuana by as early as this coming July. Such a move would create an immediate spike in weed demand in Canada, which would be perfect timing for a company like Canopy Growth that acquired Mettrum Health last year and is in the process of constructing or developing 2.4 million square feet of capacity in British Columbia.
Two stocks you may never have guessed could benefit from legal weed
However, traditional pot stocks may not be the only way to play growth in legal cannabis sales – nor is it all too safe. Remember, at the end of the day the federal government still categorizes marijuana as an illegal substance with no medical benefits. Traditional cannabis stocks could be nothing short of pummeled if the federal government tightens its stance on regulating recreational and/or medical marijuana.
But there are companies with so-called "normal" business models that could certainly benefit from the marijuana industry if it continues to expand at the state level. Here are two potentially sneaky marijuana stock plays for the future.
Scotts Miracle-Gro Company
Traditionally, Scotts Miracle-Gro (NYSE:SMG) is a company focused on gardening and lawn care. It can be a cyclical business that's dependent on both the U.S. economy and underlying weather patterns.
However, Scotts has found a new source of growth in recent years, albeit it's still a small percentage of sales: hydroponics. Since Scott's has centered its business on helping consumers and businesses grow plants and increase their yield, it's only natural for a company that stakes its existence on lighting, soil, and nutrients to jump at a growth opportunity as robust as marijuana.
In recent months, Scotts Miracle-Gro's subsidiary, Hawthorne Gardening Co., which is the entity involved in growing its hydroponics presence, has made a number of acquisitions. In its recently reported fiscal 2018 first quarter, Scotts announced 20% sales growth for Hawthorne.
During the company's second-quarter conference call in 2017, CEO Jim Hagedorn commented that hydroponics "is a space we understand really well. We're growing-people. We intend to succeed in that space. I would say anyone wants to rumble with us, come on, let's do this!"
Scotts would really prefer to see the federal government change its stance on pot, but considering that ardent cannabis opponent Jeff Sessions is the attorney general, the chances of this happening are seemingly slim-to-none. In the interim, it appears perfectly happy servicing US markets that are legal, and it should continue to see its hydroponics business handily outgrow its traditional garden and lawn care operations. At the same time, with its traditional businesses comprising a tad bit less than 90% of its sales, investors can still sleep easy at night.
Another company that could become an interesting play many years down the road is Cree (NASDAQ:CREE), a manufacturer of high-efficiency LED lighting and lighting systems.
Currently, the pot industry traditionally uses high-pressure sodium (HPS) lights to grow cannabis. But, HPS lights have two pretty major environmental and cost drawbacks. First, they generate a lot of heat, meaning air-conditioning costs to keep a room or indoor grow facility temperate for growth can be costly. They also require massive wattage on a square foot basis to optimally grow cannabis. According to Ed Rosenthal, author of the Marijuana Grower's Handbook, two 1,000-watt lamps are needed to grow right cannabis sativa plants indoors, which works out to 66 watts per square foot. That's a lot, and it's exceptionally costly.
However, LED lights run at a lower wattage than HPS lights, produce far less heat, and they're designed to last significantly longer, which should result in an all-around reduction of costs for consumers and businesses, as well as a product that's better for the environment. That's where Cree comes in.
To be perfectly clear, Cree makes absolutely no mention of the cannabis industry in its long-term strategy, but that doesn't mean a steady switch to LEDs following additional state-level legalizations couldn't begin making a top-line and even bottom-line difference for the company.
Understandably, LEDs aren't perfect. They cost substantially more upfront for consumers and businesses than HPS bulbs, so this is a hurdle that would need to be overcome. There's also concern that LEDs don't produce the same crop yield as traditional HPS bulbs.
Nonetheless, there may be a future growth channel for Cree in the budding weed business, which means marijuana stock investors may want to keep their eyes on this stock.