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Recreational Marijuana Sales Commenced in This $1.8 Billion Market This Week

By Sean Williams - Nov 25, 2018 at 10:21AM

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Two years after adult-use cannabis was legalized, it has finally gone on sale.

What's faster than a speeding locomotive? No, it's not Superman. It's actually the growth potential for the legal cannabis industry.

Following the legalization of recreational marijuana in Canada on Oct. 17, sales in our neighbor to the north could soar from a couple hundred million dollars annually -- derived from sales to medical patients and via exports to foreign markets in which medical pot is legal -- to perhaps $5 billion within three or four years. This sales growth and the prospect of marijuana stocks seeing a lot of green is a big reason behind the surge in pot stocks.

A dark outline of the United States that's partially filled in with baggies of dried cannabis, rolled joints, and a scale.

Image source: Getty Images.

The U.S. cannabis market could dwarf Canada...if legal

But what many investors might be overlooking is the enormous potential for the U.S. market. If the U.S. federal government were to change its tune on weed, the United States would easily be the world's most lucrative market for cannabis. Following midterm elections, 32 states have now legalized medical weed in some capacity, with the residents of Missouri and Utah joining in. Meanwhile, residents in Michigan voted overwhelmingly to become the 10th state to legalize adult-use cannabis during midterms.

Certain states offer cash-cow potential for the marijuana industry. In particular, California, which is already the fifth-largest economy in the world by GDP, is forecast to generate between $6 billion and $7 billion in annual cannabis sales. Put another way, California will generate more from weed than all of Canada.

Beyond the Golden State, Colorado brought in nearly $1.5 billion from pot sales in 2017, with Washington state, which legalized at the same time as Colorado, bringing in $1.3 billion in sales last year. Sales in Washington have soared from $259 million in 2015 to $786 million in 2016 to now $1.3 billion. It's even more impressive when you realize that Washington has one of the highest aggregate taxes on cannabis among legalized states at 37%. 

A tipped-over jar filled with cannabis buds lying atop a small pile of cash.

Image source: Getty Images.

A new state just commenced recreational weed sales this week

This past week, the U.S. welcomed the newest state to the ranks of those that are legally selling recreational cannabis: Massachusetts.

Back in 2016, residents of the Bay State voted in favor of Question 4, which was a legalization measure designed to regulate marijuana like alcohol. It was approved with nearly 54% of the vote. However, red tape had been a major impediment up until recently in getting product into licensed dispensaries. That changed on Tuesday, Nov. 20, 2018, when the first two recreational dispensaries in the state opened for business. Interestingly enough, Northampton Mayor David Narkewicz was the very first customer for one of the two newly opened dispensaries. 

Although Massachusetts' consumers only spent $440,011 on cannabis products this past Tuesday, which sounds like a negligible amount considering the size of the global weed market, it's just the start of what's estimated to be a $1.8 billion industry within the state when mature. Considering how long it took simply to go from vote to first sale, you can only imagine how much time it'll now take to license additional points of sale, as well as build out adequate cultivation facilities. Nevertheless, Massachusetts could very well become a very profitable state for marijuana stocks. 

A large sign outside of a cannabis dispensary that reads "Marijuana."

Image source: Getty Images.

These marijuana stocks are eyeing Massachusetts very closely

Although we're probably a year or two away from describing Massachusetts as an actual needle mover for pot stocks, a few companies are expected to lean on the Bay State in the years to come.

To begin with, upscale cannabis retailer and grower MedMen Enterprises (MMNFF -0.70%) will be looking to Massachusetts for a sales boost. Even though MedMen doesn't currently have a presence in Massachusetts, it soon will via its $682 million acquisition of privately held PharmaCann. PharmaCann has one of the five preapproved dispensaries in Massachusetts (just two are currently open for business), and it'll be the only store within 25 miles of Cape Cod. Because of its acquisition, MedMen will also receive the Holliston production facility in the state, which isn't in operation yet. Since interstate transport of cannabis isn't allowed in the U.S., having production facilities in the same state as dispensaries is a great way for a company like MedMen to vertically control its supply and lower its costs. 

You can also bet that Innovative Industrial Properties (IIPR 2.25%) is grinning ear to ear. Innovative Industrial Properties is a real estate investment trust, or REIT. It purchases buildings or land within a specific industry (in this case medical cannabis greenhouses) and then leases these facilities out for an extended period of time with built-in annual rental increases and management fees. The company already owns two Massachusetts grow facilities, including the aforementioned Holliston facility, run by PharmaCann. As demand for cannabis increases within Massachusetts, it could encourage Innovative Industrial Properties to acquire and lease more properties for a profit

Finally, KushCo Holdings (KSHB) should be happy to see Massachusetts commencing recreational weed sales. The California-based KushCo Holdings is best known as a provider of child- and tamper-resistant packaging. More specifically, KushCo works hand in hand with growers from all over the world to keep them compliant with federal, state, and local laws. As new production readies to hit dispensary shelves, a company like KushCo should be there to provide marketing and packaging solutions.

Long story short: Don't overlook Massachusetts and what these recreational sales will mean for pot stocks.

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