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Will This Be the Next Marijuana Boom?

Sean Williams, The Motley Fool

The marijuana industry is growing by leaps and bounds, and over the past two-plus years, cannabis stocks have reflected this growth. In many instances, pot stocks are up more than 1,000% since the beginning of 2016.

Behind these enormous gains are some rapidly growing sales figures and a discernable shift in the public's opinion toward pot.

The buzz behind the green rush

In terms of sales, cannabis research firm ArcView believes that, following a 33% increase in North American legal cannabis sales, to $9.7 billion in 2017, total North American sales could top $47 billion in a decade. That's a growth rate that investors simply can't overlook.

A hemp grower standing next to his crop.

Image source: Getty Images.

Meanwhile, five national polls conducted since April 2017 have found overwhelming support for legalizing cannabis in the United States. The surveys from the likes of Gallup, Fox News, CBS News, Pew Research Center, and the independent Quinnipiac University showed varied support ranging from 59% to as much as 64% for legalizing marijuana.

Even more recently, excitement has been budding on the heels of Canada's expected adult-use legalization by this summer. Should the Cannabis Act be signed into law in June, as expected, Canada would become the first developed country in the world to have legalized recreational marijuana. On top of existing medical marijuana sales and export revenue, the expectation is that recreational weed would add $5 billion or more in annual sales.

Yet, marijuana stocks have soured a bit of late. In fact, the North American Marijuana Index, which is comprised of dozens of cannabis companies throughout North America, shed 39% of its value from peak to trough between Jan. 23, 2018 and April 9, 2018.

Truth be told, there are a confluence of factors that could be at fault for pushing weed stocks lower. These include Canada slightly delaying the expected launch of recreational pot sales, as well as fears of marijuana oversupply and ongoing shareholder dilution. Then again, there's always the possibility that investors have somewhat cycled out of marijuana stocks that are directly involved with the plant in favor of stocks that operate in the ancillary marijuana industry.

Are ancillary cannabis companies the next big thing?

The ancillary pot industry describes the behind-the-scenes companies that make the cannabis industry tick without directly touching the plant. Because these companies have been out of sight throughout much of the legal weed industry's expansion in recent years, they could have the potential to really surprise Wall Street and investors in the years to come, assuming Canada legalizes recreational weed and other countries around the world open their doors to medical and/or recreational cannabis.

Here are a few ancillary industries that could be worth keeping a close eye on.

Plain white bottles on a manufacturing line, with rolled twenty dollar bills sticking out the top of them.

Image source: Getty Images.

Packaging and marketing

Perhaps the biggest opportunity for investors might be within the cannabis supply chain -- more specifically, with companies aiming to meet the rigorous packaging, marketing, and branding requirements for cannabis products. For example, Health Canada recently laid out guidelines of what recreational marijuana packaging should entail, namely, that the packaging be child-resistant and tamper-evident, with health warnings on a bright yellow background. This will minimize the ability of growers to put noticeable logos or branding on packaging. It's also where a company like Kush Bottles (NASDAQOTH: KSHB) comes into play.

California-based Kush Bottles specializes in designing and manufacturing pop-top bottles and child-resistant containers for the medical and recreational weed industry, as well as branding solutions and vaporizers. It's already serving more than 5,000 legally operating medical and recreational dispensaries throughout the world, and this figure is only expected to grow. It's essentially locking itself in as the go-to support service company for the marijuana industry.

In Kush Bottles' most recent quarter, the company reported 249% year-over-year sales growth, to $10.36 million, albeit the company lost $920,000, which was a reversal from a very small profit turned in the year-ago quarter. It's certainly one of the more visible ancillary pot industry players. 

A law enforcement officer holding a breathalyzer device.

Image source: Getty Images.

Regulation and enforcement

Another intriguing offshoot of the weed industry involves regulating and enforcing cannabis laws. One such enforcement tool that could become a hot commodity in the years to come is the marijuana breathalyzer.

In the U.S., the laws are pretty clear when it comes to driving under the influence of alcohol. The legal line in the sand is drawn at a blood alcohol content of 0.08%, with the discretion of law enforcement to cite for anything less.

However, with cannabis, things aren't so cut-and-dried. There are no preset guidelines of what entails impairment. Worse yet, tetrahydrocannabinol (THC), the psychoactive component of cannabis that gets the user "high," can stay in a person's system for days or weeks. It therefore can lead to a positive test, even if the driver hasn't used cannabis for weeks. This is where marijuana breathalyzers could come into play.

A number of prototypes in development aim to help law enforcement keep the roads safe. These portable devices can help police determine whether or not a person has recently used cannabis, which would be important in determining impairment. These devices also have the potential to dually measure blood alcohol content, providing law enforcement with an all-in-one kit for alcohol and weed. While the technology itself still is evolving and in need of further testing, the companies behind it might be worth keeping a close eye on. 

A person reaching for a neat stack of hundred dollar bills in a mouse trap.

Image source: Getty Images.

The drawbacks of the ancillary business

Though there are clearly opportunities in the ancillary cannabis market for investors, they should also realize two things.

First, understand that ancillary opportunities in marketing, packaging, enforcement, financing, consulting, and so on are completely dependent on the success of the plant-based cannabis industry, which is, in turn, reliant on growing demand and country-based legalizations. The ancillary business has virtually no chance to thrive if the cannabis industry isn't demonstrating strong growth and expansion. First and foremost, keep your eyes peeled on legal weed sales and expected legalizations, as this will dictate the need for support businesses that are behind the scenes.

Secondly, keep in mind that many of these ancillary businesses are still wet behind the ears, so expect hiccups. Whereas banks would be an exception to this rule, thanks to their diversified operations, other businesses, such as niche marijuana breathalyzer manufacturers, may still be years away from having an approved product that can be mass produced. Even if the ancillary pot industry is the next to boom, you should temper your near-term expectations.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.