The ability to identify powerful growth trends is an important aspect of successful long-term investing. Businesses with strong competitive positions in rapidly growing industries can compound investors' returns for years and even decades.
Perhaps no other industry is expanding faster than marijuana. The legal marijuana market will grow to more than $146 billion by 2025, according to Grand View Research, up from only $7 billion in 2016.
This explosive growth makes the marijuana industry fertile ground for finding excellent long-term investment opportunities. The following three businesses are particularly well positioned to profit from the cannabis market's torrid expansion in the coming decade.
The tobacco king
Altria (NYSE:MO) may not be the first company that comes to mind when thinking about marijuana, but the tobacco titan is likely to emerge as a powerful force within this booming industry.
Altria made an aggressive move into the cannabis market with its $1.8 billion investment in Cronos Group (NASDAQ: CRON). Altria now owns a 45% stake in the Canadian marijuana producer, along with warrants that give it the right to boost its stake to 55%.
Altria's regulatory and marketing expertise should help Cronos Group capture a larger share of the global marijuana market in the coming years. Additionally, the strong and steady cash flow Altria produces from its core tobacco business to help lower its risk profile for investors. Altria could also use some of this cash to acquire the remainder of Cronos Group's shares in the future, as well as other cannabis-focused businesses. Altria's investment in Cronos Group may be its first foray in the marijuana industry -- but it's unlikely to be its last.
Notably, Altria also pays a bountiful dividend, providing its shareholders with a reliable and steadily growing income stream. Its shares currently yield 5.8% and can be had for only 12 times forward earnings -- a bargain price for such a high-quality business.
The beer giant
Now that it is becoming legal in more locations, some people may choose to use marijuana as a substitute for alcohol. Alcoholic beverage behemoth Constellation Brands (NYSE:STZ)(NYSE:STZ-B) knows this. It also had the foresight to partner with a leading marijuana producer, thereby transforming it into a powerful ally, rather than a threat.
Constellation Brands has invested more than $4 billion in top Canadian marijuana producer Canopy Growth (NYSE: CGC), giving it a 38% stake in the fast-growing company. The capital injection is helping Canopy Growth add production capacity and expand internationally. Constellation and Canopy are also expected to work together to produce cannabis-infused beverages.
Like Altria, Constellation Brands is a reliable cash generator. The company's popular beer, wine, and spirits brands, including Corona and Modelo, helped it produce $1.4 billion in free cash flow over the past year. It also pays a cash dividend, which currently yields 1.7%.
At about 20 times forward earnings, Constellation Brands' stock gives investors a relatively low-cost and low-risk way to profit from the marijuana industry's torrid growth.
The real estate play
Innovative Industrial Properties (IIP) acquires facilities used to grow medical marijuana and leases them to state-licensed growers in the United States. IIP owns 13 properties across 11 states comprising more than 1.1 million rentable square feet. The properties are rented under long-term leases averaging about 15 years in length. They typically generate returns on invested capital of more than 15%.
As a REIT, IIP can avoid paying taxes on its income by returning at least 90% of its profits to investors. It does so in the form of a rapidly growing cash dividend, which currently yields 2.2%.
Thirty-three U.S. states have already legalized cannabis for medical use and more may do so in the years ahead. This gives IIP ample room to expand. And as it acquires more properties, its cash flows and profits should climb steadily over time.
At about 26 times forward earnings, Innovative Industrial Properties' stock is significantly more expensive than shares of Altria and Constellation Brands. But IIP's current $820 million market capitalization likely understates its long-term growth potential. Therefore, patient investors who buy shares today could be well rewarded in the decade ahead.