Returns of 200%, 300%, or even greater in just 12 months have become commonplace among marijuana stocks. It's not surprising that many investors are eager to find the next opportunity with the potential for huge gains.
With rising global demand for medical marijuana and the increase in legalization of recreational marijuana, capacity for growing marijuana is at a premium. Companies that grow produce such as bell peppers and tomatoes in greenhouses are well equipped to help meet that higher demand. And some of them are already making the switch to marijuana. Could the next hot marijuana stock be found in your grocery store's produce aisle?
A profitable pivot
Perhaps the best example of a produce grower switching to marijuana is Village Farms (NASDAQ:VFF). The Canadian company is one of the largest growers of greenhouse tomatoes, bell peppers, and cucumbers in North America. However, in 2016 Village Farms' CEO Mike DeGiglio saw the huge opportunity in the Canadian medical marijuana market and began to envision how his tiny company could profit from it.
That led to Village Farms teaming up with Canadian medical marijuana grower Emerald Health Therapeutics (NASDAQOTH:EMHTF) in June 2017 to form a joint venture named Pure Sunfarms. Village Farms started out by converting a 25-acre greenhouse facility to grow marijuana rather than produce.
Although the first part of the greenhouse facility conversion isn't scheduled to be done until February, the move has already paid off for Village Farms. It took the prize as the top-performing marijuana stock of 2017, racking up a gain of nearly 535% last year.
The story could get even better for the company. DeGiglio stated that growing cannabis at the facility should generate more revenue than Village Farm currently generates with all of its operations. It should also be much more profitable that the company's current produce business.
Looking for capacity
Village Farms isn't the only produce grower seeking to capitalize on the opportunity to grow marijuana. Alfred Pedersen & Son (APS) is the largest tomato and sweet pepper grower in Scandinavia. The privately held company has 2.8 million square feet of greenhouse space.
A few weeks ago, one of Canada's leading medical marijuana growers, Aurora Cannabis (NYSE:ACB), announced a joint venture with APS. This joint venture, named Aurora Nordic Cannabis A/S, will supply medical marijuana to Denmark, Sweden, Norway, Finland, and Iceland.
Aurora Nordic is also building a 1 million-square-foot facility exclusively focused on growing marijuana with projected production capacity in excess of 120,000 kg per year. As excess capacity is available, the joint venture will supply medical marijuana to additional countries in Europe.
Aurora Cannabis isn't the only Canadian marijuana grower looking to build capacity through deals with produce growers. Canopy Growth (NYSE:CGC) announced a joint venture with Les Serres Stephane Bertrand Inc. (Bertrand) in December.
Bertrand is a Quebec-based tomato greenhouse operator with 700,000 square feet of greenhouse space. Under the deal with Canopy Growth, the entire greenhouse will be upgraded and retrofitted to grow marijuana instead of tomatoes and other vegetables. The joint venture expects to be ready to begin production to supply the Canadian marijuana market by May 2018.
Time to go shopping?
So can investors really find great marijuana stock ideas by strolling down the produce aisle in their local grocery stores? There's one big wrinkle: Most produce growers aren't publicly traded.
However, I think it's still possible to profit from the migration of produce growers to the marijuana market. One way is to buy stocks of the few companies that are publicly traded. Village Farms hasn't converted all of its production capacity to growing marijuana. I suspect that the company will rapidly switch to marijuana, though, especially if the demand for recreational marijuana in Canada is as great as some predict.
The other way to potentially profit is to buy the stocks of the current marijuana growers that are teaming up with produce growers so they can more quickly expand their production capacity for marijuana. Again, if the Canadian market is as big as some think, these stocks should still have plenty of room to go higher.
Keep in mind, however, that buying marijuana stocks comes with a great deal of risk. If there's a delay in legalization of recreational marijuana in Canada, for example, it's likely that the stocks will tank. But if you're not averse to risk, now could be the time to go shopping -- and not just in the grocery store.