Please ensure Javascript is enabled for purposes of website accessibility

3 Ways to Benefit From the Cannabis Industry's Growth Without Taking on Much Risk

By David Jagielski - Mar 6, 2020 at 8:51AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investing directly in cannabis producers hasn't exactly been safe.

There's no denying that there's a lot of growth potential for the cannabis industry. Grand View Research expects that the global legal marijuana market will be worth $73.6 billion by 2027, up from an estimated $18 billion in 2019. 

And while there are significant opportunities for cannabis producers, there's also risk that comes along with that growth. Companies are learning the hard way that being too aggressive can do more harm than good as multiple cannabis producers have been laying off staff and cutting costs over the past several months in an effort to make their businesses more sustainable.

The industry is still facing many growing pains ahead, and that's why investing in the three stocks below, which have more limited exposure to the industry, might be a much safer bet for cannabis investors today.

1. Shopify

Shopify (SHOP -6.15%) is a tech company that offers companies a platform on which to conduct transactions and help process their sales. Many cannabis producers in Canada use Shopify, and in September, it announced it would be offering its services to U.S. companies that are selling hemp-derived cannabidiol (CBD) products.

With the passing of the farm bill in 2018, the hemp-derived products are now legal federally and give Shopify a way to tap into the industry's growth without running afoul of federal regulators in the U.S. 

A sign that says "marijuana store" and a few palm trees

Image source: Getty Images.

For cannabis companies that may lack the technical expertise to set up and run their own e-commerce sites, Shopify's easy-to-use platform and interface can add significant value -- not to mention sales. Even government-run websites, including the Ontario Cannabis Store, have opted to use Shopify to process online marijuana sales. 

The trust and credibility Shopify has established in its industry makes it an easy choice for cannabis companies. Should marijuana legalization progress federally, there's the potential for Shopify to eventually offer its services to companies selling tetrahydrocannabinol (THC) as well.

Although it has the opportunity to benefit from the cannabis industry's growth, with more than 1 million merchants using its platform, Shopify isn't heavily exposed to the industry and offers cannabis investors a lot of diversification and safety. 

Shopify's sales have grown from $205 million in 2015 to $1.6 billion this past year. Unfortunately, its net losses worsened from $19 million in 2015 to $125 million in 2015. At a market cap of nearly $60 billion, it's not a cheap buy, trading at over 34 times its sales over the past 12 months (value stocks typically trade well below 10 times their revenue). But with the explosive growth Shopify's already achieved coupled with a fast-growing cannabis industry, many growth investors are more than willing to look past its valuation and happy to buy the stock for the significant upside it still possesses over the long term.

2. Alimentation Couche-Tard

Alimentation Couche-Tard (ANCU.F) is another stock that's dipped its toes into the cannabis industry. The global convenience store operator is known for its Circle K brand of stores, but last year, it decided to gain exposure to cannabis by investing in a 9.9% stake of Fire & Flower, a cannabis retailer in Canada with dozens of locations. The company expressed interest in the industry in 2018, when pot was first legalized in Canada, with President and CEO Brian Hannasch stating, "We're a $60-billion company. If we're going to divert our focus from our core, we have to believe that it leads to a path of some significant scale." 

Growth is certainly something the cannabis industry can offer Couche-Tard, and one of the things the company can offer investors in return is stability. In each of the past four fiscal years, Couche-Tard has generated strong profits totaling more than $1 billion. In addition, it's also accumulated at least $900 million in free cash flow in each of the past six years. With strong financials, Couche-Tard is in an excellent position to help Fire & Flower grow and potentially take on more investments as well, especially with pot stocks being as cheap as they are today.

3. GW Pharmaceuticals

GW Pharmaceuticals (GWPH) is known for its cannabis-based medicine, Epidiolex, the first such drug that the Food and Drug Administration (FDA) has approved for use in the U.S. for two rare forms of epilepsy: Lennox-Gastaut syndrome and Dravet syndrome. While it's certainly more closely associated with the cannabis industry of these three, investing in GW is not nearly as risky as investing in a typical pot stock. The pharmaceutical company doesn't have to worry about vaping risks or bad press surrounding high tetrahydrocannabinol (THC) products such as edibles. Meanwhile, it still enjoys tremendous sales growth.

In 2019, sales of $311 million dwarfed the prior-year's tally of just $15 million, largely to do with the launch of Epidiolex in the U.S., which sent the company's revenue soaring. The drug made up $296.4 million in revenue in its first full year, accounting for the vast majority of GW's sales and the key reason for its impressive growth. And with Epidiolex looking to launch in many European markets now that regulators there have approved the drug as well, there could be a lot more growth ahead for the company.

All three stocks could offer investors a good mix of diversification and growth

The stocks listed above give investors unique ways to gain exposure to cannabis without taking on many of the risks often associated with doing so. The companies all have strong businesses that don't look to be in any imminent danger and could be attractive buys even without factoring in marijuana.

Here's a quick overview of how they've done against the S&P 500 over the past year.

GWPH Chart

GWPH data by YCharts.

While Shopify's been far and away the better investment of the three, Couche-Tard and GW stand to gain more from the cannabis industry's growth as they're more directly involved, and that could make them underrated buys moving forward.

Ultimately, it'll depend on your preference, but these stocks are great examples of ways you can invest in cannabis without taking on too much risk.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

GW Pharmaceuticals plc Stock Quote
GW Pharmaceuticals plc
GWPH
Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$350.26 (-6.15%) $-22.95
Alimentation Couche-Tard Inc. Stock Quote
Alimentation Couche-Tard Inc.
ANCU.F

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
332%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.