There has arguably been no faster-growing industry in recent memory than marijuana. According to cannabis research firm ArcView, the legal weed market in North America is projected to grow by 26% a year through 2021, yielding a market worth nearly $22 billion. This rapid growth is precisely why marijuana stocks have been such a hot investment.
Public opinion surrounding marijuana is also shifting in a big way. The latest Gallup poll, released just over a week ago, shows that nearly two-thirds of the population (64%) wants to see pot legalized in the United States. This is on top of the overwhelming 94% of the respondents in Quinnipiac University's April 2017 poll who noted their desire for medical cannabis to be legalized. Such strong support of cannabis is only liable to encourage marijuana stock investors.
However, there's one key thing that investors need to realize about pot stocks: most aren't profitable. The high costs of reinvestment, coupled with laws that are very much disadvantageous to the industry, ensure that most weed stocks lose money each year.
The cheapest marijuana stocks
But among the 15 largest marijuana stocks (i.e., those with a market cap in excess of $200 million), three stand out for being "cheap" relative to the rest of their peers. They also happen to be the only three marijuana stocks that were profitable in 2017. Let's take a closer look at these "green giants."
Hands down, the most profitable and cheapest marijuana stock by a mile is Scotts Miracle-Gro (NYSE:SMG), albeit the company comes with an asterisk that only around 10% of its current sales is tied to marijuana. The remaining 90% comes from its traditional lawn and garden care segment. This dichotomy is what's made Scotts such an attractive investment for more conservative investors who want a taste of what the legal marijuana industry can offer. If things were to go south for the marijuana industry, Scotts Miracle-Gro could simply fall back on its lawn and garden business and be no worse for wear, which provides a solid floor for investors.
Nonetheless, we're seeing some rapid growth in the company's Hawthorne Gardening subsidiary, which is primarily focused on hydroponics (growing plants in a nutrient-rich water solvent as opposed to soil), as well as lighting, soil, and nutrients for the medical cannabis industry. During the third quarter, the company reported a 21% organic growth rate for Hawthorne over the prior-year quarter.
As one of the only "marijuana" stocks with a decent amount of Wall Street coverage, Scotts Miracle-Gro is forecast to deliver $3.93 in full-year earnings per share in 2017 and a healthy $4.38 per share in 2018 -- good enough for a forward P/E of 23. Though mid-single-digit growth in its traditional lawn and garden business drags down its overall growth rate, its Hawthorne Gardening segment is continually delivering a bigger slice of sales with each passing quarter. That's bound to draw the attention of marijuana stock investors.
In terms of pure-play marijuana stocks, none is cheaper than Canadian medical cannabis producer MedReleaf (NASDAQOTH:MEDFF), which went public in May.
According to the company's fiscal fourth-quarter and full-year release, it more than doubled sales to $31.4 million in fiscal 2017 and produced $8.5 million in net income. I know this doesn't exactly should "cheap," but MedReleaf being valued at 94 times its full-year net income is considerably more palatable when you factor in a growth rate of around 100%.
The big question moving forward remains whether Canada will move forward with legislation that could legalize recreational weed by July 1, 2018. Though MedReleaf has demonstrated strong growth solely as a result of eligible patient growth and demand from the medical side of the equation, the recreational market could add $5 billion to $7 billion in annual sales, according to the Canadian government. MedReleaf has been busy reinvesting the proceeds from its initial public offering in expanding its grow capacity as its Bradford, Ontario, facility with the expectation of adult-use weed becoming legal next year.
It's also noteworthy that MedReleaf tends to target more affluent clientele. It offers higher-priced dried cannabis strains, and boasts a sizable share of the cannabis oils market in Canada. Cannabis oils are a higher-priced and higher-margin product than dried cannabis, which has been directly responsible for MedReleaf's strong profitability.
The third marijuana stock that's cheap relative to its peers is Aphria (NASDAQOTH:APHQF), another major player in the Canadian medical cannabis market. Aphria wound up producing $15.9 million in full-year sales for fiscal 2017, a 142% year-on-year increase, to go with a $3.3 million profit. This represents 954% net income growth from what Aphria reported in the previous year, and it would have been even higher had the company not devoted so much capital to capacity expansion in the fourth quarter.
Aphria, like MedReleaf, has been benefiting from growth in the medical cannabis market, but is truly gearing up for a possible expansion of recreational pot in Canada, as well as medical cannabis in foreign countries around the world. Aphria is one of just a small handful of medical cannabis growers that've been given the green light to export dried cannabis to foreign markets. Germany, which recently legalized medical cannabis and has relatively few domestic grow farms, is one such market that imports dried cannabis for medical patients.
On tap for Aphria is its phase 4 expansion project, which will cost in excess of $100 million, but could boost production to 100,000 kilograms of cannabis a year. Should recreational marijuana get the go-ahead in Canada, Aphria looks to be set to help meet an expected surge in demand come next July. Though the company is currently valued at a triple-digit P/E, its triple-digit growth rate makes its valuation far more reasonable.