You could rightfully call 2018 a turning point for marijuana stocks. Canada legalized marijuana for recreational use by adults. Michigan became the 10th U.S. state to legalize recreational marijuana, while Missouri and Utah joined the growing club of states that allow medical marijuana. And the November 2018 elections resulted in more representatives in the U.S. Congress who support changes to federal laws regarding marijuana. 

All of this could mean 2019 emerges as an even better year for marijuana stocks. Canada should move past the initial supply-chain problems with its recreational marijuana market. The country is also likely to finalize regulations for cannabis edibles -- including cannabis beverages -- and concentrates. In the U.S., the prospects for the federal government to leave marijuana legalization to the individual states appear to be better than ever.

But which marijuana stocks are best positioned for success in the new year? Here's what you need to know about the top marijuana stocks to buy in 2019.

Marijuana leaf outline in a fireworks show

Image source: Getty Images.

Understanding the marijuana industry

Before buying any stock, it's important to understand the underlying business. And the marijuana industry is more complex than it might seem at first glance.

First, there are key geographic considerations. Canadian pot stocks have received the most attention from investors over the past few years. That makes sense, with Canada's mature medical marijuana market and the country's heavily anticipated legalization of recreational marijuana in 2018. As a result of these factors, the world's largest marijuana producers are based in Canada.

But Canada will generate less than 12% of the total marijuana sales worldwide in 2019, according to estimates from Arcview Market Research and BDS Analytics. The U.S. is and will continue to be where the most money is made for the marijuana industry, with nearly 80% of global marijuana sales in 2019. 

There are also different areas of focus within the marijuana industry, resulting in different types of marijuana stocks. The three main kinds of marijuana stocks are:

  • Marijuana producers.
  • Ancillary products and services providers.
  • Cannabis-focused drugmakers.

Marijuana producers represent the most pure-play way to invest in marijuana stocks. These companies cultivate marijuana (often in indoor facilities and greenhouses), produce cannabis products, and distribute the products to customers. 

Ancillary products and services providers don't grow cannabis plants themselves. Instead, these companies supply the products and services needed for marijuana growers and others in the cannabis industry to conduct their business successfully -- from fertilizer and lighting systems to distribution and financing.

Cannabis-focused drugmakers include any biotech or pharmaceutical company that specializes in developing prescription drugs based on ingredients from the cannabis plant called cannabinoids. These companies conduct clinical testing of these cannabinoid drugs and market the products after receiving U.S. Food and Drug Administration approval or regulatory approvals in other countries. 

What to look for in marijuana stocks

The two key things to look for in marijuana stocks are similar to what you should look for in any stock: growth opportunities and the ability to capitalize on those opportunities.

Growth opportunities are pretty easy to find for most marijuana stocks. More countries around the world are legalizing medical marijuana. More U.S. states are doing so as well, with several also legalizing recreational marijuana. 

However, pay close attention to the geographical regions where specific marijuana stocks can operate. Some Canadian marijuana stocks, for example, can't conduct business in the U.S. and maintain their listings on major stock exchanges as long as the sale of marijuana remains illegal at the federal level in the United States.

Determining how well a given marijuana stock can capitalize on its growth opportunities isn't as easy. For marijuana producers, capacity -- typically measured in kilograms of cannabis that can be grown on an annual basis -- and distribution channels make a big difference in how much companies can grow. Potential competition is a factor for all types of marijuana stocks. 

Top marijuana stocks for 2019

Several marijuana stocks appear to have especially strong growth opportunities and a solid ability to capitalize on those opportunities. Here  are the top marijuana stocks meeting these criteria that look like great picks to buy in 2019:

Company 

Type 

Market Cap 

Constellation Brands (NYSE:STZ)

Marijuana producer $34.2 billion

Innovative Industrial Properties (NYSE:IIPR)

Ancillary products/services provider $527 million

KushCo Holdings (NASDAQOTH:KSHB)

Ancillary products/services provider $444 million

Liberty Health Sciences (NASDAQOTH:LHSIF)

Marijuana producer $256 million

Origin House (NASDAQOTH:ORHOF)

Ancillary products/services provider $301 million

 Data source: Yahoo! Finance. Market caps as of Dec. 17, 2018. 

Constellation Brands

Constellation Brands ranks as the No. 1 premium beer company in the U.S., with best-selling brands Corona and Modelo. While the beer industry, in general, hasn't grown all that much, Constellation has generated industry-leading growth thanks to its high-end and craft beers. But Constellation Brands is also a marijuana stock now, thanks to its 38% ownership stake in big Canadian marijuana producer Canopy Growth (NYSE:CGC). 

Constellation made a multibillion-dollar bet on Canopy Growth because it thinks cannabis is a "once-a-century disruptive market transition" and that Canopy Growth is the best marijuana supplier in the world. The company is one of several beverage makers that have been attracted to the possibility of launching a new category of beverages -- cannabis-infused drinks. In addition, beverage companies have been concerned that marijuana legalization could negatively affect the sales of alcoholic beverages. By getting involved in the marijuana industry, Constellation hopes to offset any losses from shifts in consumer demand from alcohol to marijuana beverages. 

But just how big is the cannabis opportunity? Constellation believes the total addressable global market could top $230 billion within the next 15 years. 

Of course, Constellation and Canopy won't be able to capture all of that market. Still, Constellation projects that Canopy could realistically claim up to 40% of the Canadian market and between 5% and 15% of the market in the rest of the world, including the United States. 

Capacity shouldn't be an issue. Canopy Growth has 4.3 million square feet of growing space licensed for production. The company's total growing space is 5.6 million square feet -- the most of any Canadian marijuana producer

As for distribution channels, Canopy secured supply agreements for the recreational marijuana market with all of Canada's provinces. The company has a strong global presence, with operations in Australia, Europe, Latin America, Africa, and the Caribbean. Constellation's retail operations in the U.S. would also provide an immediate distribution channel for Canopy's cannabis products should federal laws change to allow the company to expand into the U.S. market.

Constellation and Canopy together present a combination that's currently unmatched in the global marijuana industry. While there are other partnerships between major Canadian marijuana producers and companies outside the industry, none of them are as tightly integrated and well positioned competitively as that of Constellation and Canopy.

The obvious question, though, is, why go with Constellation Brands instead of Canopy Growth? The primary advantage for buying Constellation is that the company's core beer, wine, and spirits businesses provide stability while it also stands to benefit from potentially explosive growth in the global marijuana industry through its stake in Canopy. Constellation also holds the option to buy a majority interest in Canopy Growth in the future, something the company is likely to do if the marijuana market grows as quickly as anticipated.

In addition, Constellation has a couple of other pluses. Its stock trades at a forward price-to-earnings ratio (share price divided by predicted earnings per share) of less than 18 and a price-to-sales ratio (share price divided by sales per share) of 4.3 -- a much more attractive valuation than Canopy Growth claims. Constellation also pays out a modest dividend yield (annual dividend paid divided by share price) of 1.6%.  

Innovative Industrial Properties

Innovative Industrial Properties is a real estate investment trust specializing in the medical cannabis industry. REITs are investment companies that own real estate assets, which allows retail investors who wouldn't ordinarily be able to buy whole buildings to get in on real estate growth. Stocks of REITs can be attractive for marijuana investors in comparison with pure-play marijuana stocks because REITs spread their risk across multiple leaseholders -- even if one or two fail, it's not catastrophic to the whole investment. Innovative Industrial Properties currently owns nine properties, all of which are either greenhouses or indoor facilities used for cultivating marijuana.

There are a couple of main growth opportunities for Innovative Industrial Properties. First, the company has plenty of room to expand in the seven states where it already operates: Arizona, Maryland, Massachusetts, Michigan, Minnesota, New York, and Pennsylvania. Importantly, three of these states -- Arizona, Massachusetts, and Michigan -- could have marijuana markets of well over $1 billion by 2022, according to Arcview Market Research and BDS Analytics. 

The other primary growth opportunity for Innovative Industrial Properties is to expand into additional states. Thirty-one states have legalized medical marijuana. Many marijuana producers could find that leasing facilities rather than buying is a financially attractive option, presenting opportunities for Innovative Industrial Properties.

One key advantage for Innovative Industrial Properties in capitalizing on these opportunities is the company's solid balance sheet. The company has no debt, which makes it easier for Innovative Industrial Properties to invest in buying and developing new properties.

The company is also profitable, thanks to leasing out all of its properties and generating an average annual return from its investments of 15.7%. With a weighted-average lease length (which gives the lease terms of larger tenants more weight than smaller tenants) of around 15 years, Innovative Industrial Properties should be able to count on a dependable revenue stream for a long time to come.

It's possible that other REITs will enter the cannabis space. However, Innovative Industrial Properties has developed expertise in the industry that will take time for potential rivals to build.

Investors also have one other thing to like about Innovative Industrial Properties: a nice dividend. As a REIT, the company is required to return at least 90% of taxable income to shareholders through dividend payouts. The company's dividend yield currently stands at 2.69%. 

KushCo Holdings

KushCo Holdings is the top supplier of packaging solutions to the U.S. cannabis industry. The company offers packaging products including pop-top bottles, vaporizer cartridges, tubes, and other containers -- all designed specifically for cannabis products.

Multiple growth opportunities exist for KushCo. Because KushCo has become the go-to source for packaging solutions for cannabis businesses, the company should profit from expansion in the U.S. marijuana market. Marijuana Business Daily projects the U.S. market will more than triple by 2022, with total sales of $22 billion. KushCo hopes to capture a significant share of the portion of that total amount that will be spent on packaging. Its vaporizer segment also stands to benefit from growing consumer demand for these products.

The company is also looking to grow in Canada and in Europe. Although investors have focused heavily on the Canadian opportunity, Europe could be a big market for KushCo as well, with several countries, notably including Germany and the United Kingdom, allowing the use of medical marijuana.

In addition, KushCo is expanding into other areas of the cannabis supply chain. The company's acquisition of Summit Innovations in May 2018 led to its establishment of Kush Energy, which focuses on supplying the cannabis industry with hydrocarbons and solvents, both of which are important in extracting cannabinoids from cannabis plants.

KushCo also acquired Zack Darling Creative Associates, with its subsidiary The Hybrid Creative, in July 2018. This deal provides another avenue for growth in providing branding, marketing, and e-commerce solutions to the cannabis industry.  

While KushCo could face competition down the road, these expansions help give the company a cushion if larger packaging companies decide to jump into the cannabis market. KushCo's established relationships with marijuana growers and expertise in meeting their needs should also give the company a competitive advantage.

Liberty Health Sciences

Liberty Health Sciences might seem to have a relatively limited opportunity at first glance. The company produces medical marijuana and operates dispensaries in Florida. However, there's more to this story.

Florida is on track to become the third largest marijuana market in the U.S. by 2022, with total marijuana sales of $1.7 billion, according to Arcview Market Research and BDS Analytics. Liberty Health Sciences is one of only 14 licensed producers in the Sunshine State.

Liberty CEO George Scorcis estimates that the company claims a market share of roughly 15% currently, giving the company a strong position with relatively few competitors. But he thinks the company's expansion of its cannabis production facility and the addition of more dispensaries should boost Liberty's market share to 25%.

The Florida opportunity alone makes Liberty Health Sciences an attractive prospect for investors. The company's current market cap -- the total value of all outstanding shares -- is only a little higher than the dollar amount of annual sales that Liberty should be able to generate in Florida within a few years.

Liberty Health Sciences isn't limited to only Florida, though. The company plans to expand into more states that have solid medical marijuana markets, with an Ohio dispensary opening in 2019 and Massachusetts, New Jersey, and Pennsylvania on the short list. 

Origin House

Origin House ranks as the top distributor of marijuana products in California. The company distributes more than 50 brands to around 70% of the dispensaries in the state. 

The California market gives Origin House a tremendous opportunity for growth. California's legal recreational marijuana market opened for business in 2018. By 2022, the state's total annual marijuana sales should more than double to $7.7 billion -- nearly one-fourth of worldwide marijuana sales. Origin House is poised to profit by distributing many of the top-selling brands. 

The company owns several of those brands. Origin House currently generates around 70% of its total revenue from the distribution, with close to 30% of revenue stemming from sales of its own brands, according to CEO Marc Lustig. This mix is likely to shift to a 50/50 split as the company acquires more brands.

Although its core business is in California, Origin House is based in Canada. The company expects to see growth from its home country, too. In September 2018, Origin House acquired 180 Smoke, a leading vaporizer retailer in Canada, with 26 retail locations and solid online retail operations.

Over the long run, Origin House's strategy is to replicate its success in California in other markets. In particular, the company plans to export its brands into additional states in the U.S. and into other countries.

What about potential competitive threats? It won't be easy for another company to dislodge Origin House from its position as the top distributor in California, as long as it does a good job serving its customers and partners.

And while the competition for cannabis brands is intense, Origin House has an edge thanks to its distribution business. The company's data allows it to have a unique insight into which brands perform the best -- and therefore which brands it should acquire. Overall, these advantages make Origin House one of the most promising under-the-radar marijuana stocks on the market.

Risks for marijuana stocks

While the opportunities for marijuana stocks are great, so are the risks. In the U.S., the most significant risk is that the industry's growth could be hampered by federal laws that ban the sale of marijuana. Although the likelihood that the federal government could crack down on marijuana businesses appears to be decreasing because of recent election outcomes, the possibility of such an action persists.

One key thing for investors to watch in 2019 is the stance of the new U.S. Attorney General. Previous Attorney General Jeff Sessions was adamantly opposed to marijuana legalization and even overturned Obama administration policies that prevented the U.S. Department of Justice from interfering in states that had legalized marijuana. It's not known yet what actions Sessions' replacement might take with respect to marijuana.

Investors should also monitor the progress of legislative efforts to revise federal laws to leave marijuana legalization decision to the individual states. Setbacks for these efforts could cause marijuana stocks to fall.

Both in and outside the U.S., there's a risk that marijuana markets won't grow as quickly as anticipated. Most marijuana market projections assume that more countries will legalize medical and/or recreational marijuana. If that doesn't happen, marijuana stocks could experience significant declines as positive estimates don't come to fruition. It's also possible that existing markets where marijuana is legal won't expand as much as expected as a result of onerous regulations, high taxes, supply problems, or other issues.

And for each of the five marijuana stocks discussed earlier, there's a good possibility competitors will be more successful. All of the companies have early-mover advantages in their respective markets, but their leads aren't insurmountable.

Given these risks, investing in marijuana stocks is best suited only for aggressive investors. Even these investors should be aware of the risks and proceed cautiously by not investing more than a small amount of your overall portfolio in marijuana stocks.

The keys to winning in 2019 and beyond

There are two keys to winning in 2019 and beyond through investing in marijuana stocks. One is to pick the right stocks to buy. Constellation Brands, Innovative Industrial Properties, KushCo Holdings, Liberty Health Sciences, and Origin House appear to have what it takes to check that box.

The other key is to invest with a long-term perspective. All of these stocks could experience significant volatility over the short term. But if global marijuana industry growth is even close to what many expect it will be, there will be plenty of marijuana stocks that deliver market-beating returns. These five top marijuana stocks are more likely than most to be in that group.