Marijuana stocks have been on a tear because of legalization tailwinds, but there could still be more running room ahead for cannabis companies. If you're hunting for marijuana stocks to add to your portfolio, it could be a good time to consider buying top pure-play marijuana stocks Canopy Growth (NASDAQOTH: TWMJF), Aphria Inc. (NASDAQOTH: APHQF), and GW Pharmaceuticals (NASDAQ: GWPH). Or if you're looking for a less risky way to benefit from growing demand for marijuana, it might be smart to add Scotts Miracle-Gro (NYSE: SMG) or Constellation Brands (NYSE: STZ) to your holdings. Here's why the marijuana market is so intriguing, how big the opportunity could be, and why these stocks are top stocks to own.
A marijuana market primer
Marijuana legalization on a state-by-state basis catches all the headlines, but the marijuana opportunity is global. In addition to progress that's being made creating marijuana markets in states like Colorado, entire countries, including Canada and Germany, represent massive, multibillion-dollar marijuana opportunities.
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In the U.S., more Americans favor legalizing marijuana than at any point in the past 50 years, according to Gallup polls. Gallup began asking Americans about their views on marijuana in 1969, and at that time, only 12% were in favor of legalizing cannabis. Today, 64% of the country is on board with legalization. Marijuana support is broad-based too. A majority of Democrats, independents, and Republicans believe marijuana should no longer be outlawed.
So far, 29 states have listened to their constituents and passed laws legalizing marijuana in some form. Some states have only legalized cannabidiol, a non-psychoactive cannabinoid that's found in marijuana. Other states have passed laws allowing people to grow and buy marijuana for medical purposes, and eight states -- Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, and Washington -- have passed laws legalizing recreational marijuana.
Marijuana remains illegal in the U.S. on a federal level, but other countries are embracing it nationally. For example, Canada licenses and regulates its medical marijuana market on a national level, and that has turned Canada into a major marijuana market that's home to some of the world's biggest pure-play marijuana stocks. Canadian dispensaries already sell marijuana to 200,000 certified clients, and that number could double if Canada officially greenlights a national recreational marijuana market in 2018.
In Europe, Germany's progress toward legalization makes it one of the most attractive global marijuana markets, too. Germany already issues licenses allowing marijuana companies to import and market marijuana for medical use, and it's expected to grant marijuana grow licenses soon. Heavily populated markets such as Brazil and Australia support global sales growth for marijuana growers and distributors as well.
The biggest pure-play marijuana stocks
The majority of marijuana stocks that U.S. investors can buy don't trade on the biggest stock market exchanges. Instead, they trade over the counter on the Pink Sheets. Companies list on the Pink Sheets to avoid expenses associated with governance that the major market exchanges require, including the New York Stock Exchange. As a result, many marijuana stocks that trade over the counter are extremely risky, because they expose investors to a greater risk of fraud.
There are some pure-play marijuana stocks that investors can consider buying, though. For instance, Canopy Growth is a $2.75 billion market cap Canadian marijuana company that's listed on the Toronto Stock Exchange and also trades over the counter in the United States.
Canopy Growth should be on your radar because it's the market share-leading marijuana company in Canada, and it recently won a major investment from the beer, wine, and spirits Goliath Constellation Brands. In the past year, Canopy Growth has spent a lot of money acquiring competitors, boosting marijuana production capacity, and establishing marketing and distribution programs. For instance, it acquired Mettrum earlier this year, and it claims that its Tweed Farms is the largest marijuana-producing greenhouse in the world, with over 350,000 square feet of licensed production space.
The company's investments put it in an excellent position to capture a big chunk of Canada's recreational market when it opens for business in 2018, especially now that Constellation Brands' 10% ownership stake gives it a treasure trove of product positioning and marketing experience to learn from.
Canopy Growth's sales over the past 12 months total $44.2 million, and while it's not turning a consistent profit yet, revenue is growing rapidly. Sales jumped to $17.6 million from $8.5 million a year ago last quarter, and tailwinds from the upcoming recreational market opportunity should accelerate the company's progress toward profitability.
Investors ought to consider buying Aphria shares, too. Aphria's spending over $100 million to increase its production capacity to compete against Canopy Growth for Canadian market share, and recently it inked an intriguing deal to supply roughly 1,300 Shoppers Drug Mart and Pharmaprix locations in Canada with dry cannabis for e-commerce.
Aphria's smaller than Canopy Growth -- its trailing 12-month sales are $17 million -- but Aphria's spent less money on expensive acquisitions, and that's allowed it to deliver more consistent profitability than Canopy Growth. Aphria's also an intriguing alternative to Canopy Growth because it's been more willing to explore ways to profit from U.S. marijuana legalization.
For example, it announced in July that it's investing in a special-purpose private company that will sign deals to manage marijuana businesses in U.S. states that have legalized marijuana. The company's first tie-up is in Florida, where the medical marijuana market could grow to $700 million or more.
Finally, GW Pharmaceuticals could be a good fit for investors interested solely in medical marijuana. Marijuana has been used medically for a long time, but that use has been backed by anecdotal evidence rather than results from rigorous clinical studies. GW Pharmaceuticals is changing that by conducting some of the most comprehensive medical marijuana research in the world.
GW Pharmaceuticals efforts have already paid off with European approval for Sativex, a THC-derived drug used sparingly in multiple sclerosis patients who suffer from muscle spasms, and it could soon secure an FDA OK for Epidiolex, a cannabidiol drug for the treatment of rare forms of epilepsy.
In trials, using Epidiolex reduced monthly seizures by about 40% in patients with Dravet syndrome and Lennox-Gastaut syndrome. Studies are ongoing that could eventually allow Epidiolex's use in other forms of epilepsy, providing the company with a nine-figure or higher revenue opportunity. There's no guarantee the FDA will approve Epidiolex, but if it does, it will become the first marijuana drug available in America for epilepsy that's got the regulator's stamp of approval.
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Another way to play marijuana
Marijuana's market potential is massive, but that isn't a secret. Marijuana stocks have already skyrocketed because of investor optimism, and as a result, these aren't cheap stocks to buy. If sky-high price-to-sales metrics worry you, then you might be better off considering backdoor marijuana stocks that could benefit from marijuana growth.
Scotts Miracle-Gro, for example, is a $6 billion market cap fertilizer and seed company, with $2.6 billion in trailing 12-month sales and a price-to-sales ratio of only 2.29, which is far lower than the pure-play marijuana options I've mentioned. Scotts Miracle-Gro gets only a small proportion of its revenue from the marijuana industry, but a string of acquisitions has turned it into a major seller of hydroponics products that marijuana growers use to increase productivity, and that business is humming along nicely.
The company reports its marijuana-related revenue under its newly minted Hawthorne banner. Hawthorne's sales jumped 137% year-over-year last quarter, including acquisitions. Even if you take out acquisitions, Hawthorne's volume still grew 20% year over year last quarter. That's better than the growth Scotts Miracle-Gro is generating elsewhere, and that's unlikely to change anytime soon. The company thinks Hawthorne can grow by double-digit percentages over the next several years, and if it's right, then that growth will add another percentage point or two to companywide growth.
Alternatively, Constellation Brands could be a savvy stock to buy. Investments in craft breweries, including Ballast Point, have it growing faster than Scotts Miracle-Gro, and its investment in Canopy Growth provides it with plenty of exposure to marijuana. If Canopy Growth succeeds, then its investment will become more valuable. Also, Constellation Brands is Canopy Growth's exclusive adult-beverage partner, so there could be some intriguing opportunities for cannabis-infused alcohol on its horizon.
One final thing to remember
The potential for marijuana to generate billions of dollars in global sales is there, but it remains to be seen exactly who the winners and losers will be. The marijuana market is still in its early stages of development, and like many growth industries in the past -- I'm looking at you, Internet -- there will be booms and busts that could significantly reward and punish investors. Because of the risks, approaching marijuana stocks with a healthy dose of caution and an eye on diversification could be smart.
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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.