Investing in marijuana stocks can be a very risky proposition.
There's a real possibility that the Trump administration could attempt to enforce federal anti-marijuana laws in states that have legalized marijuana. Falling prices due to commoditization are another major concern. For Canadian marijuana stocks, the potential failure of efforts for national legalization of recreational marijuana stands as a significant risk.
Is there a way to make money from the marijuana industry without so much risk? Maybe so. One alternative suggested by CNBC's Jim Cramer is to buy shares of Brink's Company (NYSE:BCO). But is this really the least risky way to profit from the marijuana stock boom?
Why Brink's? First, because it's the top provider of services for transporting cash securely. Brink's trucks have become synonymous with armored transportation of money and valuables. Second, because the marijuana industry still deals largely in cash.
A big problem that marijuana-related businesses face is a 1970 federal law known as the Bank Secrecy Act. This legislation mandates that all financial institutions regularly monitor their customers' accounts for potential criminal activity. Banks and other financial institutions are prohibited from doing business with customers who engage in criminal activities.
Any marijuana-related business in the U.S. is technically engaging in a criminal activity, since federal anti-marijuana laws remain in effect. This is true even for businesses in states that have legalized marijuana. As a result, many banks are very reluctant to knowingly take on marijuana-related businesses as customers. One big bank even shut down the accounts of a major marijuana advocacy group recently.
Many banks refuse to deal with marijuana-related businesses because of concerns that they could be in violation of the Bank Secrecy Act. The effect of this is that these businesses must conduct transactions solely in cash, which could potentially generate lots of cash.
That's where Brink's comes in. It's not a financial institution, so it can serve marijuana-related businesses without the worries that banks face. The company both transports money and provides vault outsourcing services -- just what businesses that can't have bank accounts need.
Brink's stock has performed nearly as well as many marijuana stocks over the last 12 months. Its shares have soared nearly 140% since July 2016. Could this surge be related to growth in its base of customers in the marijuana industry?
You'd think that Brink's could be riding the wave of marijuana legalization and the increased number of related businesses needing cash-management services. However, there are a few wrinkles in this theory.
First, there's no way to know for sure just how much marijuana business Brink's is actually getting. The company doesn't provide enough details in its financial reports to determine this. Management doesn't hint at the amount of revenue Brink's receives from the marijuana industry in earnings call comments.
Second, Brink's financial improvement that helped drive its stock higher stems more from South America than the U.S. In the first quarter of 2017, for example, South America accounted for 87% of the company's year-over-year revenue increase. North America (including the U.S., Canada, and Mexico) generated only 11.4% of total operating profit improvement from the prior-year period.
Third, the company stated that its first-quarter increase in U.S. revenue came primarily from sales of on-site cash recycling services to a national retailer. That's clearly not related to a marijuana business. Brink's also stated that a secondary driver of higher U.S. revenue was from increased volume with its global services business, which provides secure international transportation of valuables. Again, this factor doesn't seem to be tightly linked with the marijuana industry.
A better lower-risk pick
I suspect that Jim Cramer is right that Brink's should benefit from continued marijuana legalization by states. I also think that buying Brink's stock is less risky than investing in most marijuana stocks. However, Brink's isn't the best lower-risk option for cashing in on the marijuana boom, in my view.
Scotts Miracle-Gro (NYSE:SMG) has a stronger link with the marijuana industry. The company is a major supplier of fertilizers, lighting systems, and hydroponics products to marijuana growers. And Scotts' management team hasn't been shy about its desire to capture more of the market share in the industry, especially with larger players.
In addition to this closer association with the marijuana industry, Scotts Miracle-Gro looks more attractive than Brink's from both valuation and growth perspectives. Scotts stock trades at less than 20 times expected earnings, while Brink's stock trades at 22 times expected earnings. Wall Street analysts project that Scotts Miracle-Gro will increase earnings by an average annual rate of 10.15% over the next five years -- a little higher than the 10% annual growth expected for Brink's.
If you're looking for the least risky way to profit from the marijuana industry, I think Scotts Miracle-Gro just might be your answer. Remember, though, that investing involves a trade-off between risk and returns. Scotts stock should be less risky than most marijuana stocks, but the potential gains could also be lower than buying higher-risk, pure-play marijuana stocks.