Few industries are growing more quickly and consistently at the moment than legal marijuana, which is a big reason marijuana stock valuations have shot through the roof. ArcView, one of the leading cannabis research companies, found that legal sales in North America soared by 34% in 2016 to $6.9 billion and projects a compound annual growth rate of 26% through 2021. In other words, we could be talking about almost $22 billion in annual legal weed sales throughout North America within a few years.
Favorability toward pot is a big reason cannabis stocks have been on fire. In the U.S., an Oct. 2017 Gallup survey found an all-time record number of respondents (64%) favored the idea of legalizing weed. Such strong support would be expected to put pressure on Congress to consider rescheduling cannabis such that it's no longer wholly illegal.
Investing in marijuana stocks is inherently risky
Nevertheless, plenty of risk remains for marijuana stock investors. Earlier this month, U.S. Attorney General Jeff Sessions announced that he'd be rescinding the Cole memo, which was a loose set of rules that legalizing states agreed to follow in order to keep the federal government off their backs. Sessions' one-page memo announcing the move suggested that the Cole memo overstepped its bounds. Its eradication opens the door for state prosecutors to bring charges against marijuana businesses, should they choose.
Beyond this recent concern, the federal government's Schedule I classification creates problems of its own. Medical cannabis researchers are mired in red tape since there's only one federally approved grow facility in the country, which makes running all-important benefit-versus-risk analysis studies difficult.
Also, pot-based businesses face a slew of financial issues. Most have limited access to basic banking services, including something as simple as a checking account, since they report to the Federal Deposit Insurance Corporation, a federally created entity. Since weed is illegal at the federal level, banks could, in theory, be charged with money laundering if caught providing financial services to the industry.
Marijuana stocks also get virtually no corporate income-tax breaks due to U.S. tax code 280E. This tax code disallows companies that sell federally illegal substances from taking normal corporate income-tax deductions.
The safest marijuana stocks to buy
Thus, in spite of the legal weed industries' rapid growth, investing in marijuana stocks isn't exactly the safest thing you can do. There are, however, safer marijuana stocks than others. If you're looking to dip your toes into the water to take advantage of the green rush, then consider these the safest marijuana stocks to buy in 2018.
If there's such a thing as minimizing your risk to the marijuana industry, Scotts Miracle-Gro (SMG -0.33%) is the company for you. As of the end of 2017, 89% of the company's sales were derived from its traditional lawn and garden care business, which is weather-dependent and tends to grow or contract by a mid-single-digit percentage each year. It's relatively stable, so investors fully understand what to expect.
The remaining 11% of sales is derived from its Hawthorne Gardening Co. subsidiary, which is catering to the medical cannabis industry. Hawthorne, which has primarily grown by acquiring mom and pop and small businesses in recent years, is focused on hydroponics (growing plants in a water solvent rich with mineral nutrients), as well as lighting, nutrient, and soil solutions. In 2017, Hawthorne's sales increased by 131% to $287.2 million while profits for the segment tripled. As long as sentiment toward medical cannabis remains positive, there's little reason to believe that Hawthorne can't grow sales by a strong double-digit percentage in 2018.
What makes Scotts Miracle-Gro safe is the simple fact that the U.S. could completely crack down on weed, and it would be able to lean on its core lawn and garden business, which makes up almost 90% of total sales, without much disruption. What's more, Scotts is a global company, so it would still probably have plenty of interest from North American (Canada and Mexico) and European growers. There's not much that could happen to weed in the U.S. that would make much of a dent in Scotts' long-term growth plan.
Another intriguing "safe" marijuana stock to consider buying is the largest cannabinoid-based drug developer, GW Pharmaceuticals (GWPH). Even if the U.S. federal government were to clamp down on cannabis use, GW Pharmaceuticals' lead experimental drug, Epidiolex, could still thrive.
Epidiolex is a cannabidiol (CBD)-based therapy targeted at two rare types of childhood-onset epilepsy, Dravet syndrome and Lennox-Gastaut syndrome. CBD is the non-psychoactive component of cannabis. In two separate pivotal-stage studies for each indication, Epidiolex handily met its primary endpoint of statistical significance with regard to seizure frequency reduction from baseline relative to the placebo. For instance, Epidiolex wound up tripling the seizure frequency reduction from baseline (39%) relative to the placebo (13%) in Dravet syndrome. If approved, Epidiolex is widely expected by Wall Street to have peak annual sales potential of around $500 million, if not higher. Within a few years, it could be responsible for moving GW Pharmaceuticals into the black on a recurring basis.
Though there's always the possibility the Food and Drug Administration (FDA) could hit GW Pharmaceuticals with a complete response letter (essentially a rejection), I don't believe this to be the biggest risk in 2018. Instead, a possible scheduling by the Drug Enforcement Agency of what could be the first cannabinoid-based therapy could take time, leading to a delayed launch. However, even with possible delays in launching Epidiolex and getting an OK from the FDA on a marketing label, GW Pharma looks to be among the safest marijuana stocks to consider buying.
Among actual cannabis growers, the safest marijuana stock looks to be OrganiGram Holdings (OGI -1.92%).
I can imagine you're surprised that it's not Canopy Growth Corp. (CGC -0.52%), Aphria (NASDAQOTH: APHQF), Aurora Cannabis (ACB -0.20%), or MedReleaf (NASDAQOTH: MEDFF), which might combine to control about half of the Canadian medical industry market share. The deal is that all four of these major players have seen their valuations catapult higher, with a few, like Canopy Growth, sporting a triple-digit forward P/E ratio. Even with recreational weed expected to be approved in Canada by July 2018, it's tough to tell if these already elevated valuations can expand much further.
Meanwhile, OrganiGram Holdings is losing money -- but probably not for long. It's in the process of more than doubling the growth capacity at its Moncton, New Brunswick, location to 429,000 square feet, which ultimately should more than triple its annual dried cannabis production to 65,000 kilograms from 20,000 kilograms. As a result of this increase in production, an expected boost in domestic weed demand, and the fact that OrganiGram centralizes its production in one location so as to minimize costs, its forward P/E is under 30, making it a relative steal compared to the bigger names in this industry.
What's more, Aurora Cannabis has made a hostile bid for CanniMed Therapeutics, a similarly sized Canadian cannabis grower as OrganiGram. If that acquisition attempt fails to materialize, OrganiGram could well become a target, putting a theoretically high floor under its share price in 2018.