Please ensure Javascript is enabled for purposes of website accessibility

Why Every Investor Needs At Least 1 Pot Stock in Their Portfolio

By David Jagielski - Jan 22, 2021 at 7:25AM

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

There are many different ways to profit from the sector's growth.

The global cannabis market could be worth as much as $47 billion in just four years. That would be more than three times what it was worth in 2019. With incredible growth prospects and still only 15 states having legalized recreational marijuana, cannabis is one of the hottest industries out there right now.

For investors who want a balanced and diverse portfolio, buying pot stocks makes a whole lot of sense, even if you're risk-averse. There are plenty of options out there and you don't need to invest in licensed producers in order to take advantage of the industry's incredible growth potential. If you haven't invested in cannabis just yet, here's why you should consider it, regardless of your investing strategy:

Marijuana leaves.

Image source: Getty Images.

It's a rare opportunity

The cannabis industry is still in its very early growth stages. Only two countries -- Canada and Uruguay -- have legalized marijuana for recreational use thus far (although Mexico could soon become the third). There's hope that under Joe Biden, the U.S. could pass marijuana reform as well, even if outright legalization may still be a long shot.

For investors, this is a rare opportunity to buy shares of companies that are experiencing significant growth and will likely continue doing so for the foreseeable future. Multistate marijuana operator Trulieve Cannabis (TCNNF 2.78%) has reported $353.1 million in sales over its last three quarters -- double what it generated in the previous year. 

And what's remarkable is that Trulieve is achieving those numbers with the bulk of its operations in its home state of Florida. Earlier this month, it opened its 76th dispensary in the country (and 71st in Florida). Trulieve has also made moves to expand into other parts of the country, including Connecticut, Massachusetts, California, Pennsylvania, and West Virginia. 

But expansion still isn't easy, because marijuana is illegal at the federal level. For example, even though pot is legal within the states of Oregon and Washington, it can't legally be transported across state lines. A company like Trulieve can't just ship its products to those states. In order to expand into those areas, it would need to either set up operations within those states or acquire companies that already operate there. This isn't a cheap or easy option, and is a significant impediment to the industry's growth. And so as impressive as Trulieve's numbers are today, they could look a whole lot better once marijuana is legal federally. 

Even if you think legalization may not happen for years, now could be a great time to invest in a pot stock. Support for marijuana legalization in the U.S. is at record levels with 68% of Americans now in favor of it.

There are many options out there for a variety of different investors

If you're hesitant to invest in the industry because you think licensed producers are too risky, there are several other ways you can gain exposure to cannabis without directly investing in growers.

GrowGeneration (GRWG -3.98%) owns hydroponics and gardening stores, and it provides equipment for people to grow a variety of crops, including cannabis. It's an appealing investment because its products can be of use to marijuana producers and also individuals who live in states where it's legal to grow pot at home. GrowGeneration has been an ultra-hot stock over the past year, rising more than 1,000% in value, blowing past the S&P 500 and its 14% over the same time frame. Its sales over the past nine months have totaled $131.4 million and have more than doubled the $54.3 million that the company reported a year earlier.

For income investors, Innovative Industrial Properties (IIPR 0.84%) is a real estate investment trust that can generate significant cash flow over the long term. The company buys properties that cannabis growers use, and its sales of $79.8 billion over the past three quarters have soared 196% year over year. And its dividend yield of 2.6% is better than the S&P 500 average, which is just 1.6%. In addition, the company has aggressively raised its payouts over the years, the most recent being a 6% hike last month. Since going public in December 2016, Innovative Industrial has increased its payouts nine times.

Investing in cannabis may be the best option right now

The Dow Jones remains at record levels, and many stocks today are trading at or near their highs even though the economy isn't in great shape as a result of the COVID-19 pandemic. And that means finding good stocks that can generate good returns won't be easy.

Cannabis stocks, however, will continue to grow as the industry gets bigger and more states legalize recreational pot, making them appealing investments over the long term. New Jersey was the largest state to pass marijuana reform this past November, and neighboring New York may not be far behind. With plenty of growth still left, cannabis is one area that still looks like a great place to invest in today.

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

Trulieve Cannabis Stock Quote
Trulieve Cannabis
TCNNF
$15.16 (2.78%) $0.41
Innovative Industrial Properties Stock Quote
Innovative Industrial Properties
IIPR
$131.21 (0.84%) $1.09
GrowGeneration Corp. Stock Quote
GrowGeneration Corp.
GRWG
$5.06 (-3.98%) $0.21

*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 service.

Stock Advisor Returns
330%
 
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 05/21/2022.

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.