Marijuana legalization is sweeping across the U.S., at least at the state level. So far, 33 states have legalized medical cannabis, and 11 (plus the District of Columbia) have also made it legal for recreational use.

But there are plenty of dominoes left to fall as this trend gains momentum. Several more states could vote to legalize marijuana in 2020, and one stock in particular could be the biggest winner if they do.

Map of U.S. with cannabis leaves on each state

Image source: Getty Images.

Cannabis is coming (maybe)

Let's first review which states could legalize recreational marijuana this year, since the market potential for recreational use is much larger than for medical cannabis. One is a lock to vote on recreational pot legalization -- New Jersey. A ballot measure will go before the state's voters in November.

The Garden State is the biggest prize among the 2020 cannabis candidates. Medical marijuana is already legal there, polls show the majority of state residents support legalization. It's likely to be a big addition to the recreational marijuana market, too: Arcview Market Research and BDS Analytics predict that legal New Jersey pot sales will top $1 billion by 2024.

Arizona residents may also vote on legalizing recreational pot in November. In 2016, the state came really close to passing a ballot initiative that would have allowed the legal use and sale of recreational marijuana. Three competing versions of a ballot question on the matter are being pushed there now, and a win for marijuana advocates could be in the cards this time around.

A handful of other states might vote this year to legalize recreational marijuana, but those appear to be more uphill battles. On the other hand, it won't be surprising if a few more states join the list of those allowing legal medical cannabis. Efforts are underway in Idaho, Mississippi, Nebraska, and South Dakota to put medical cannabis legalization initiatives on the fall ballot.

Potential winners

There are arguably several companies that could win from the legalization of marijuana (either recreational or medical) in additional states. KushCo Holdings (OTC:KSHB), for example, could benefit as new markets open up for the company's packaging solutions.

MedMen (OTC:MMNFF) already operates medical cannabis dispensaries in Arizona. The company would probably seek to expand its presence there, as well as move into New Jersey, should those states' voters approve legalization initiatives.

Top multistate cannabis operators could also benefit from the opportunities to expand into new markets. Like MedMen, Cresco Labs (OTC:CRLBF) has retail cannabis locations in Arizona. Thanks to its recent acquisition of Origin House, Cresco is also now a leading cannabis distributor in California. It wouldn't be surprising if the company beefed up its operations in Arizona and targeted the New Jersey recreational market as well.

Green Thumb Industries (OTC:GTBIF) is another potential winner. It has a retail cannabis store in New Jersey already and is planning to open a cultivation center in the state. GTI isn't in Arizona yet, but it does have operations in the neighboring states of California and Nevada.

No. 1 pick

Prices of all of these marijuana stocks could rise if one or several of the states mentioned vote to legalize in some form later this year. But there's one stock that seems positioned to be the biggest winner from any expansion of the legal market.

Scotts Miracle-Gro (NYSE:SMG) can sell its products to cannabis operators anywhere in the country. Its stock price skyrocketed 73% in 2019 during a dismal period overall for marijuana-related stocks, and Scotts' management team thinks the trends that helped it so much last year will continue into 2020.

Regardless of whether the cannabis in question is headed for recreational or medical use, Scotts' Hawthorne Gardening subsidiary profits by providing growers with the equipment they need. The company has found tremendous success, for example, in Florida's medical cannabis market. But new recreational markets would present it with an especially big growth opportunity. 

You could argue that KushCo could be in the same position as Scotts in that it would likely be able to sell its products right out of the gate in any state that legalized cannabis. But while KushCo is still losing money every quarter, Scotts is profitable and should see its earnings grow by a double-digit percentage next year. For those looking to invest in the company that's set to be the clearest winner from any expansion of the legal marijuana market in 2020, Scotts Miracle-Gro is the stock to buy.


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.