The marijuana industry has been growing like a weed for years, but it brought something new to the table in 2018: legitimacy.
Following years of promises from Canadian Prime Minister Justin Trudeau, and months of debate in the Senate, Canada became the first industrialized country to give the green light to adult-use weed in June, with sales officially beginning on Oct. 17, 2018. Rolling out the red carpet for cannabis signifies that this is a valid business model that could potentially make investors very rich over the long run.
The Empire State appears to be on the cusp of its own green rush
But the marijuana movement isn't just confined to Canada. Plenty of advances were also witnessed in the United States, with the U.S. Food and Drug Administration approving the first cannabis-derived drug, President Trump signing the Farm Bill into law, thereby legalizing hemp and hemp-based cannabidiol products, and a handful of states legalizing pot in some capacity. As of the end of last year, roughly two-thirds of the country had given the OK to medical marijuana, with 10 of those states also allowing adult-use cannabis.
Even though the federal government has been steadfast on its classification of marijuana as a Schedule I substance – i.e., wholly illegal, prone to abuse, and not recognized as having any medical benefits – it hasn't stopped state-level legalizations. In fact, they've accelerated in recent years.
Although nothing is set in stone, the next state that could be on the docket to legalize recreational pot is New York. Gov. Andrew Cuomo, a Democrat, announced in mid-December that legalizing recreational weed would be a top priority within the first 100 days of 2019.
Cuomo's support for adult-use cannabis follows a relatively positive report from New York's Department of Health that found the benefits of legalization would outweigh the risks. If legalized medically and recreationally, New York's weed industry is expected to generate up to $3.1 billion in annual sales. With the exception of California, which could see as much as $7 billion in sales by the early part of next decade, and perhaps $11 billion annually by 2030, it would make New York the biggest marijuana player in the United States.
Three marijuana stocks set to benefit if New York goes green
All of this money flowing into the Empire State's pot industry has to go somewhere. The big question is "Where?" Assuming Cuomo stays on target and is able to pass a recreational weed bill in the state's legislature by April 2019, the following three pot stocks could be long-term beneficiaries.
One of the most logical beneficiaries of New York state legalizing adult-use marijuana would be vertically integrated dispensaries, such as MedMen Enterprises (MMNFF 17.07%). By "vertically integrated" I mean companies that not only retail cannabis, but also own grow farms and/or processing facilities, too. Since the federal government doesn't allow the interstate transport of cannabis, controlling the supply chain from seed to shelf can be quite cost-effective for dispensaries.
MedMen is currently only operating a little over a dozen pot dispensaries in the U.S., albeit three of its open locations are in New York. However, MedMen's presence in the Empire State is set to grow with its pending $682 million buyout of privately held PharmaCann. PharmaCann was awarded four dispensary licenses (Albany, Amherst, Bronx, and Liverpool), as well as a license for a nearly 128,000-square-foot production facility from New York state.
Based on sales at its oldest locations, MedMen has demonstrated that the upscale cannabis store concept, which aims to change the cannabis-buying experience, works. Unfortunately, the need for the company to rapidly expand its physical presence could weigh on its bottom line for years. Once the PharmaCann deal is complete, it's not out of the question that MedMen will be losing $75 million-plus on an operating basis each and every quarter. This would be expected to lessen as MedMen's physical store base grows, but it could be unpleasant for shareholders in the near term.
Innovative Industrial Properties
Another prime beneficiary in New York state would be real estate investment trust (REIT) Innovative Industrial Properties (IIPR 2.78%).
The cannabis REIT model is pretty simple: It involves purchasing weed grow farms and, in some instances, processing facilities, and then leasing these assets for long periods of time, generating rental income. These properties can then be sold in the future for a profit, allowing a REIT to begin the reinvestment process anew.
Innovative Industrial Properties ended 2018 with 11 managed properties, all of which boasted an initial lease term of 15 to 20 years, a 1.5% management fee, and a rental increase of about 3.25% per year. The management fee and rental increase clause ensure that this company stays ahead of the inflationary curve.
Of its 11 properties, two of them are located in New York. This includes one facility that's leased to none other than PharmaCann, and another leased to Vireo Health. The legalization of recreational weed in what would likely be the second-largest market by annual sales in the U.S. would probably encourage Innovative Industrial Properties to seek out additional properties for lease in the Empire State, and it certainly wouldn't lack for demand from growers.
While there are dilutive concerns to be wary of with Innovative Industrial Properties, it's one of the very few pure-play pot stocks that's currently profitable on an operating basis.
Check out the latest Canopy Growth earnings call transcript.
Last, but not least, I'm going to go off the grid just a bit with Canopy Growth (CGC 10.36%), the largest marijuana stock by market cap in the world.
Recently, Canopy Growth was awarded a hemp production and processing license in New York, with the company announcing plans to invest $100 million to $150 million in this processing facility in the southern tier of the state. This license follows the noted December passage of the Farm Bill, which gave hemp and hemp-based products a green light. When combined with Canopy's purchase of ebbu, a company that's rich in cannabis- and hemp-based intellectual property, it could easily turn Canopy Growth into a hemp powerhouse in the United States.
To be clear, hemp and cannabis aren't the same plant, and Canopy has no intention of entering the New York cannabis market if the U.S. federal government hasn't changed its tune on recreational weed. However, if Canopy does invest heavily in New York as expected, and if the U.S. government does reschedule or remove cannabis from the list of controlled substances, then it would put Canopy in an advantageous position in the second-biggest pot market in the United States.
Obviously there are a lot of "what if's" to the Canopy Growth scenario, but improved favorability toward marijuana among Americans increases the eventual likelihood of federal reforms, and therefore Canopy's outperformance in the Empire State.