Investing in a fast-growing industry can be an excellent way to uncover stocks with loads of potential. The semiconductor market is expanding at a compounded annual growth rate (CAGR) of more than 9%, per estimates from Fortune Business Insights. Insight Partners projects the cloud computing business to be even more promising, with its CAGR up around 24%.
But that's still a drop in the bucket compared to one sector: cannabis pharmaceuticals. Analysts at Grand View Research say this sector could grow at a ridiculous CAGR of 104.2% until 2028. With that kind of predicted growth, this is an opportunity that investors should be careful not to overlook.
Companies are showing a growing interest in cannabis
You may be inclined to think that to invest in cannabis, you need to invest in companies that are cultivating marijuana. But that isn't the case. Many companies have been slowly venturing into the sector in recent years. There are some large-cap stocks that you may be surprised to learn have been gaining exposure to the cannabis industry.
One of the reasons there's been a slow-and-steady uptick in companies diving into the sector is due to the federal ban on marijuana in the U.S. Even today, there remains just a single cannabis-based drug that the Food and Drug Administration has approved for use: Epidiolex. Jazz Pharmaceuticals (JAZZ 0.77%) acquired the company that makes the drug, GW Pharmaceuticals, in a $7.2 billion acquisition last year.
Healthcare giant Pfizer (PFE 0.23%) also gained exposure to the cannabis pharmaceuticals market with its $6.7 billion acquisition of Arena Pharmaceuticals last year. Cannabis-based therapeutics are only part of Arena's pipeline, and they're not something Pfizer highlighted in its acquisition of the company when announcing the deal. That makes it hard to gauge how much of a factor those therapies were for Pfizer, but it now has some exposure to cannabis nonetheless.
Why medical marijuana may be a safer growth option than recreational
Pharmaceutical companies may be a natural fit for the cannabis industry. While there's lots of hype surrounding legalizing marijuana for recreational use, the medical market is a growing market that's safer one to invest in. Even in the U.S., where more than 30 states have legalized marijuana for recreational use, there's still no guarantee as to when legalization may take place. And when reform does inevitably happen, medical marijuana may be permitted long before the recreational market opens up. Take Canada, for example -- it legalized marijuana for recreational use in 2018, but medical use was permitted back in 2001.
Today, Jazz Pharmaceuticals is expanding Epidiolex into multiple medical marijuana markets in Europe, which could lead to significant growth for the business down the road. That wouldn't be a reality for the business if Epidiolex was a recreational product. Some countries have been moving toward permitting recreational use, but investors shouldn't expect it to occur quickly. Last year, Malta (with a population less than 500,000) became the first European country to pass legislation permitting recreational marijuana use.
Investors should keep an eye on companies expanding into cannabis
Companies remain cautious on any expansion efforts into cannabis, as seen with Pfizer's acquisition of Arena Pharmaceuticals. While that acquisition likely won't change Pfizer's near-term prospects, it's a positive sign that the company isn't averse to potentially progressing toward cannabis. And it's a trend that investors should watch, as it may lead to some exciting growth opportunities in the future.
Today, the best option for tapping into the cannabis pharmaceuticals market is Jazz, simply because it has the only FDA-approved cannabis drug in its portfolio. But over time, that may change, especially if the federal government eases its rules on the substance.
