There are plenty of reasons you shouldn't buy marijuana stocks.
Many of them are extremely speculative. Most marijuana stocks claim stratospheric valuations. Many companies in the marijuana industry are losing money. Selling marijuana remains illegal under U.S. federal law, which means the federal government could lower the hammer in states that have legalized marijuana any time it chooses to do so. The bottom line is that investing in marijuana stocks is very risky.
However, there is one really good reason to buy marijuana stocks. In fact, I'd say it's the single most compelling reason to buy marijuana stocks right now. What is it? One word: growth.
Image source: Getty Images.
Growth up north
One place that growth for marijuana stocks seems assured is Canada. Medical marijuana has been legal in Canada since 2001. There are over 40 authorized licensed providers in the country that grow and sell marijuana to be used for medical purposes.
Canadian Prime Minister Justin Trudeau promised in his campaign to legalize recreational use of marijuana. Trudeau took a major step toward honoring that commitment in April by introducing legislation that would pave the way for marijuana to be used legally for recreational purposes by July 2018.
As with medical marijuana, the Canadian government will license providers of recreational marijuana. Companies that already have licenses for medical marijuana could be in prime position to expand dramatically. It's no surprise, then, that the current licensed providers that are publicly traded have seen their stocks soar. Between January 2016 and April 2017, Aphria (NASDAQOTH: APHQF) shares skyrocketed more than 600%. Canopy Growth (TWMJF +21.05%) stock nearly quadrupled in the same period.
International professional services firm Deloitte released a report projecting that the Canadian retail marijuana market could grow to as much as $8.7 billion annually. Companies like Aphria and Canopy Growth can expect to claim a significant share of that market.
Growth in the U.S.
National legalization of marijuana doesn't appear to be likely in the U.S. for a while. However, 29 states have legalized medical marijuana, with eight states plus the District of Columbia legalizing recreational marijuana.
In 2016, the U.S. marijuana industry generated estimated revenue of $6.7 billion, according to Arcview Market Research. By 2020, though, the market size is expected to grow to around $19 billion -- bigger than the NFL. And by 2026, Cowen and Company thinks the U.S. marijuana market will bring in $50 billion.
The U.S. marijuana industry is highly fragmented right now, with lots of small players. It's possible the old adage that a rising tide lifts all boats will prove true. Perhaps growth of the U.S. marijuana market will mean that many of the small companies now will grow much larger. Some marijuana stocks that are trading over the counter could move to major exchanges and claim impressive market caps.
Another possibility is that there will be significant consolidation among current companies operating in the U.S. marijuana industry. Successful Canadian companies like Aphria and Canopy Growth might even look to their southern neighbor for expansion opportunities. Regardless of which scenario plays out, growth of the U.S. marijuana market seems to be a foregone conclusion.
Image source: Getty Images.
Overcoming a lot of negatives, but...
Enormous growth overcomes a lot of the negatives associated with investing in marijuana stocks. Companies that are currently speculative could be respectable. Seemingly ridiculous valuations seen now could be justified. Losses could turn into big profits. Significant risk could be converted to significant rewards.
It's important for investors to understand, though, just how much growth will be required to make all of that happen. A lot of anticipated growth is already baked into the prices of marijuana stocks. Canopy Growth, for example, claims a market cap of close to $900 million, but it made a little over $25 million in revenue during the last nine months of 2016. Like Aphria, Canopy Growth has reported profits -- but only because of one-time events that can't be counted on in the future.
This might have sunk in for some investors. The share prices for both Aphria and Canopy Growth have fallen more than 30% since early April.
Perhaps the best way to profit from growth in the marijuana industry is to look at the market from a different angle. All of those marijuana growers will need supplies to be successful. In fact, the Deloitte report that projected the retail marijuana market in Canada would grow to perhaps $8.7 billion. It also estimated that the market for peripheral marijuana products and services could increase that number to as much as $22.6 billion. This indicates that the market for supplying marijuana growers could be even bigger than the market for the growers themselves.
One stock that should be a big winner in supplying marijuana growers is Scotts Miracle-Gro (SMG 0.95%). Scotts is a major provider of fertilizers, lighting, and hydroponic products that are essential to the marijuana industry. The company has also been steadily acquiring smaller companies to beef up its presence in these peripheral markets. Scotts Miracle-Gro should benefit from the tremendous growth expected in the marijuana markets of the U.S. and Canada without some of the negatives currently associated with marijuana stocks.
