In the years to come, few industries will offer the growth potential presented by the ongoing legalization of marijuana. Following Canada's green-lighting of recreational cannabis last year, and the steady legalization of pot at the state level in the United States, sales for cannabis soared to $10.9 billion worldwide in 2018. But by the end of the upcoming decade, they could near $200 billion a year, according to investment firm Stifel. That's a compound annual growth rate of more than 27% through 2030.

Despite cannabis being a nascent industry, the potential for incredible returns isn't lost on Wall Street. In fact, professional money managers have been embracing the green rush, as evidenced by 13F filings from mid-August.

An investor writing and circling the word buy underneath a dip in a stock chart.

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Form 13F is a required filing with the Securities and Exchange Commission by money management firms with more than $100 million in assets under management. These filings provide a snapshot of what big-time money managers were holding at the end of the previous quarter (in this instance, as of June 30, 2019). Though 13F filings have their flaws -- e.g., the portfolio snapshot they provide is 45 days old when they're released -- they still offer value as a resource for identifying early investment trends. And one of those key trends has been money managers flocking to select pot stocks.

According to data from 13F aggregator WhaleWisdom, the following three pot stocks have seen significant ownership increases among large-scale institutional investors.


During the second quarter, institutional investors increased their collective ownership in Quebec, Canada-based grower HEXO (NASDAQ:HEXO) to 23.19 million shares, which is up more than 44% from the sequential first quarter. In spite of 22 funds closing their position, 49 funds created a new position, with 116 13F filers holding HEXO as of June 30.

So, why HEXO? For starters, it's one of the more de-risked cannabis stocks in the industry. Even with supply concerns remaining persistent throughout Canada, a significant chunk of HEXO's capacity is spoken for, thanks to its April 2018, five-year supply deal with its home province of Quebec. The deal entails an aggregate of at least 200,000 kilos over those five years, with Quebec having the option to extend the agreement for a sixth year. When combined with the output from its Newstrike Brands acquisition, the Quebec supply agreement will likely account for 30% of the company's total production through 2023.

Four vials of cannabinoid-rich liquid lined up on a counter.

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HEXO has also been snagging deals left and right, in addition to its landmark supply deal with Quebec. In April, it signed a two-year, 80,000-kilo-in-aggregate agreement with extraction-services provider Valens GroWorks that'll see Valens provide resins and distillates that HEXO can use in the creation of high-margin derivatives. As a reminder, derivative pot products will become legal on Oct. 17, with products such as edibles, vapes, and infused beverages hitting dispensary shelves by mid-December.

Don't forget that HEXO was also a first mover in the infused beverage space when it formed a joint venture with Molson Coors Brewing known as Truss. Even though infused beverage competition should be fierce, HEXO's early partnering with Molson Coors should give Truss competitive advantages that the joint venture can build off of.

OrganiGram Holdings

OrganiGram Holdings (NASDAQ:OGI), the only major pot grower located in the Atlantic region of Canada, also drew quite a lot of interest during the second quarter. WhaleWisdom shows that 77 13F filers owned shares of OrganiGram at the end of June, totaling 21.11 million shares. That's up from only 134,085 shares at the end of March -- the big jump being the result of OrganiGram uplisting to the Nasdaq in May. Big-time fund managers don't typically buy companies listed on the over-the-counter exchange.

As alluded to before, one factor that allows OrganiGram to stand out is its geographic location. Based in New Brunswick, the company has easy access to its home province, Prince Edward Island, Nova Scotia, and Newfoundland and Labrador. These may be less-populated regions of Canada than, say, British Columbia or Ontario, but early surveys have shown that adult cannabis-use rates in these Atlantic provinces are much higher than the Canadian national average. Also, as icing on the cake, OrganiGram is one of just four pot stocks with supply agreements in place with all of Canada's provinces.

An up-close view of a flowering cannabis plant at a large indoor grow site.

Image source: Getty Images.

Institutional investors' liking for OrganiGram probably also has to do with the company's efficiency. Management has been consistently calling for 113,000 kilos of peak annual output from its lone growing facility in Moncton, New Brunswick. Yet this growing facility has less than 500,000 square feet of cultivation space. By utilizing three growing tiers at Moncton, OrganiGram should be able to produce around 230 grams of cannabis per square feet. By comparison, most pot growers are projected to yield between 75 grams per square foot and 125 grams per square foot at peak production.

OrganiGram is also very much ready for the launch of derivative products. The company has developed a nano-emulsification technology that speeds up the initial onset of cannabinoids. It'll be introducing this product first as a powder that consumers can add to their own beverage, but the company is actively seeking a partner, too, to develop its own line of beverages containing this proprietary technology. Further, OrganiGram should have the capacity to produce 4 million kilos of cannabis-infused chocolate per year.

Suffice it to say that there are plenty of reasons for money managers to be excited about OrganiGram.

Village Farms International

Lastly, large-scale institutional investors have been flocking to pot stock Village Farms International (NASDAQ:VFF). At the end of the second quarter, 61 13F filers owned 4.43 million shares of Village Farms, up 71% from the end of the March quarter. There was also notable interest from hedge funds, which increased their holdings in the company by 556% from the sequential quarter.

Similar to HEXO and OrganiGram, there are multiple factors that are likely influencing money managers to buy in.

Early in the second quarter, the duo of Village Farms and Emerald Health Therapeutics, which have combined to form the Pure Sunfarms joint venture, announced that the venture would purchase a second 1.1-million-square-foot greenhouse from Village Farms. With Pure Sunfarms already boasting the 1.1-million-square-foot Delta 3 facility, the adjacent Delta 2 facility essentially doubled production. According to management's conservative expectations, these two retrofit projects will yield at least 150,000 kilos per year when operating at full capacity (Delta 3 is already operating at its full annual run rate of 75,000 kilos).

An outdoor hemp grow farm with a tall hemp plant in the foreground blocking out the sun.

Image source: Getty Images.

Village Farms has also been active on the hemp front. You see, the signing of the farm bill by President Trump in December opened the door for industrial hemp production and hemp-derived cannabidiol (CBD) in the United States (CBD being the nonpsychoactive cannabinoid best known for its perceived medical benefits). Hemp is traditionally rich with CBD, and it's considerably easier to grow than cannabis, making it a win-win for hemp producers. With some estimates suggesting that the U.S. CBD market could average more than 100% growth per year through 2023, we shouldn't be surprised to see Village Farms forming joint ventures to plant hemp throughout the United States.

Also, don't overlook Village Farms' more traditional vegetable-growing business. Even though it tends to be low margin, it often generates predictable sales and cash flow. Clearly, money managers like what they see from Village Farms International.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.