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It's impossible to argue with the fact marijuana has come an extremely long way in a relatively short period of time. Only 25 years ago, California became the first state to legalize cannabis for medical purposes, when voters passed The Compassionate Use Act of 1996. The nation's inaugural medical marijuana bill followed a few decades of slow grassroots efforts to destigmatize marijuana after it was officially classified as a Schedule I drug in 1970 when Congress passed the Controlled Substances Act. In 2021, a majority of U.S. citizens live in states where some form of marijuana consumption is legal and companies that grow and sell pot trade on major U.S. stock exchanges such as the NASDAQ. The history of cannabis in the U.S. and North America in the 20th Century is complicated, and there is no real need to dive much deeper in order to understand the paradigm-shifting times we are living through. Instead, potential marijuana industry investors might want to focus on the rapidly expanding U.S. market, already worth roughly $20 billion a year. Cannabis cultivation dates back thousands of years, with plants growing naturally in various regions of the world. Uses have varied over time, from herbal medicines to hemp-based textiles made in the early days of the United States. Today, cannabis is utilized for medical and recreational purposes. The two most widely known and used cannabinoids are Cannabidiol (CBD) and Delta-9-Tetrahydrocannabinol (THC). CBD is the non-intoxicating, non-psychoactive side of cannabis, while THC is the core mind-altering and psychoactive chemical in marijuana. Both are known to provide anti-inflammatory and analgesic effects, along with other health-focused benefits such as natural sleep aids and appetite boosters. Marijuana and CBD are used medically for people suffering from various forms of cancer, multiple sclerosis, HIV/AIDS, Crohn's disease, and beyond. There is even a cannabidiol-based medicine approved by the FDA for the treatment of childhood seizures associated with multiple syndromes. Beyond a Grassroots Movement Colorado and Washington approved adult-use recreational marijuana measures in 2012, less than 20 years after California's groundbreaking medical marijuana bill. The momentum is building quickly, with Connecticut, New Mexico, Virginia, and New York having all joined the legal recreational marijuana ranks this year. The recent additions bring the total number of states with legislation to regulate legal recreational cannabis for adult use to 18 states, two territories, and D.C. The rapidly expanding group includes a range of regions and broader political leanings, from Arizona to Illinois. In total, nearly 45% of U.S. adults live in a jurisdiction where recreational marijuana has been legalized. The adoption of medical marijuana is even more widespread, with it legal in 37 states and four territories. Recent polling data tells a similarly striking story of progress. A November 2020 Gallup poll showed 68% of U.S. adults are in favor of marijuana legalization, up from roughly 50% in 2012 and around 30% in 2000. Crucially, it is not only younger American's driving the sea change. People ages 18 to 29 are the group most in favor of legalization, at 80%, while it dips slightly to 75% approval for people between 30 and 49. Meanwhile, 60% of Americans between 50 and 64 are in favor of legalization, with the figure still at 55% for those 65+. These are borderline mind-blowing figures in a country regularly dividend nearly 50/50 on many issues, especially seemingly politically-charged subjects. Gallup's results were supported by similar data in an April 2021 Pew Research poll. Legal marijuana bears little resemblance to what it looked like even five years ago. On top of the warp speed state-by-state legalization efforts in the U.S., Canada in 2018 became the first Group of Seven country to legalize adult-use recreational marijuana on a national level–five years after Uruguay legalized in 2013. The U.S. is also on track to be surrounded by the two largest legal marijuana markets in the world, after Mexico's Supreme Court in June declared the prohibition of recreational marijuana use in the country to be unconstitutional. Along with the North American momentum, a recent study said 47 out of a total of 196 countries have legalized some form of medical cannabis. Continued . . . | ||||
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| Lingering Legal Grey Area In spite of all the adult-use and medical marijuana progress, cannabis remains a Schedule I drug in the U.S., landing on the same list as heroin and LSD. Though full federal legalization appears inevitable, partisanship and gridlock in Washington remain an obstacle. Various and competing bills circulating D.C. make matters harder to decipher. Nonetheless, investors big and small have already gotten in on the ground floor of the booming industry, with their sights set on long-term profits, which are likely to be sent to new heights when full U.S. federal legalization occurs. In the meantime, the legal grey areas create difficulties and opportunities. Marijuana's classification under federal law makes running a successful pot business in the U.S. rather complicated and cumbersome, especially when it comes to money and intrastate commerce. At the moment, most local U.S. and national banks don't want anything to do with the booming legal marijuana market given all the various state laws and complex and expensive compliance standards. The possession, distribution, and sale of marijuana remains illegal under federal law. Therefore, "any contact with money that can be traced back to state marijuana operations could be considered money laundering and expose a bank to significant legal, operational and regulatory risk," according to the American Bankers Association. The ABA has called for "greater legal clarity" surrounding the legal standing of banking services for legal marijuana businesses because the current situation has left banks "trapped between their mission to serve the financial needs of their local communities and the threat of federal enforcement action." At the moment, fewer than 700 U.S. banks and credit unions actively provide banking services to marijuana-related businesses, according to the Financial Crimes Enforcement Network. The SAFE Banking Act aims to address these issues, while full federal legalization would put an end to any banking worries. This backdrop is why no U.S. cannabis growers or touch-the-plant firms are listed on major U.S. exchanges. The complications and federal laws have elevated Canadian growers, who currently trade both in Canada and on the NYSE or NASDAQ. Most of the prominent Canadian marijuana companies are positioned to dive headfirst into the U.S. market as soon as legalization occurs, boosted by an array of contingent debt/stock deals with thriving American players of various shapes and sizes. These publicly traded pot companies are growing quickly. Yet, the peculiar financial standing and broader compliance worries contribute to some of the wild swings in the space, since large money management firms and institutional investors have largely shied away from investing heavily in Canadian touch-the-plant stocks. The uncertainty complicates things for growers and other businesses that deal directly with the sale of cannabis. The environment has, however, created a niche market of companies operating within the broader legal marijuana world, while never actually touching the plant. Don't Touch the Plant Outside of growers and pure-play pot companies, an array of firms currently provide exposure to legal marijuana, while maintaining enough distance to help attract larger institutional investment. This theoretically provides greater stability amid the current legal grey area in the U.S. The broader don't touch-the-plant space includes a few large pharmaceutical companies, some industry-specific real estate investment trusts (REITs), and industry suppliers. Of all the ancillary stocks and industries, one space stands out in particular: hydroponics. In the most basic language, hydroponic gardening or farming simply means growing without the use of soil, by utilizing formulated, mineral nutrient solutions in water. Aeroponics is an offshoot of the same process focused on nourishing plants with a nutrient-laden mist. The history of hydroponics dates back a long time, though its modern, technology-driven incarnation is only starting to flourish. NASA has used the process to grow plants in outer space and Walt Disney World hosts tours of its massive, futuristic, hydroponics-focused greenhouse at Epcot. Vegetables, fruits, and for our purposes, marijuana, are planted in an inert growing media and constantly supplied with nutrient-rich solutions, oxygen, and water. The modern process often occurs indoors, where light, temperature, and carbon dioxide levels are carefully controlled. Hydroponics allows for year-round growing, larger yields, and nearly complete control of the process from start to finish, especially in the massive industrialized warehouses dominating the legalized pot industry. The process utilizes far less water and far less space, enabling efficiency and scale. Hydroponics spans from multi-million dollar grow operations to small home gardens, ranging from discreet closet grows to kitchen-table plants. The method is a mainstay in the marijuana industry and large outdoor grow operations are quickly becoming relics. The industry is also attractive since the technique is slowly being adopted around the world for farming as a whole since the techniques enable food to be grown in areas of the world where crops aren't supported by the soil, from cities to deserts. Cannabis growers have an array of different hydroponic techniques to pick from, depending on their space, time, and knowledge. These options include everything from deep water culture to ebb and flow. The details of each specific variation aren't necessary at the moment, but the plethora of options provides context for current sales and growth potential. Greener Future The global hydroponics market reportedly hit around $10 billion in 2020, with it expected to reach over $22 billion in 2028. Other estimates suggest the global hydroponics market is set to reach approximately $16 billion by 2025. Meanwhile, the U.S. vertical farming industry is estimated to come in at $32 billion by 2030, with a CAGR of 25%. Unlike growers, there are multiple U.S.-based hydroponic companies currently trading on the NASDAQ and other large U.S. stock exchanges. These firms don't touch the plant directly even though they sell tons of equipment to help fuel the growing legal marijuana market. Large institutional investors are pouring more money into hydroponics stocks, with many stocks grabbing at least 50% institutional ownership, compared to many pure-play pot stocks who come in closer to 15% or less. The U.S. represents approximately 30% of the global hydroponics industry and is home to roughly 1,000 hydroponic stores. These stores, which range from smaller shops to huge Home Depot-style warehouses, supply both home growers and large producers. Products include nutrients, additives, growing media, environmental and atmospheric controls, benching, lighting, water filtration, irrigation, and much more. The larger the grower, the more likely they are to utilize various offerings such as delivery, equipment financing, and maintenance. Industry expansion continues as more states legalize marijuana for both adult-use and medical. As more customers enter the market, more supply will likely be needed to meet rising demand. This means more equipment. Hydroponics companies also benefit from marijuana's federal standing since it prohibits interstate commerce. Therefore, even the largest U.S. marijuana growers, pulling in upwards of hundreds of millions of dollars in revenue a quarter, have to open brand new grow operations in every state they wish to sell legal cannabis. If and when federal legalization occurs, even if it's a slimmed down version focused on banking deregulation and decimalization, hydroponics players stand to benefit since a majority of their revenue comes from non-durable goods. For instance, one large public hydroponics company makes 60% of its money from consumables such as nutrients. The firm in focus is currently the largest hydroponics supplier in the country and is in the midst of a wave of acquisitions of smaller, sometimes one-off shops throughout the country. The stock is also focused on rolling out more private label products to help boost margins. Many companies in this industry have easily posted 60% or higher sales growth over the last several years. And it's not just smaller companies benefiting from the expanding hydroponics industry. In fact, one of the most established names in traditional home gardening and lawn care saw its stock price go on an epic run on the back of its surging hydroponics sector. Supplying Long-Term Growth Technology dominates most aspects of the modern world, including large outdoor, soil-based farming. Hydroponics takes the science of farming into 2021 and beyond, even if it doesn't catch on overnight. As the world becomes more urbanized, people live farther away from farms. The logical progression is for farms and the food to follow the population. Indoor and vertical farming appear poised to slowly capture more market share given the investment dollars pouring in. Investors include major retailers like Walmart and Amazon because the ability to grow nearly anything, anywhere is a can't miss opportunity. One recent study from the University of Arizona concluded that highly efficient hydroponics allows nearly 95% of seedlings to be grown to maturity, compared to between 90% in strong years and down to 70% or less in drought or flood years through traditional farming. The pandemic also likely permanently shook up some industries and downtown areas, as more people plan to work remotely or in a hybrid environment. This could free up some abandoned or underused office space, for new industries to step in, with indoor farming already gaining steam. The legal marijuana industry is already highly competitive and brand-building is king, similar to other consumer packaged goods sectors, from cereal to beer. No matter which growers grab enough market share to win out, the companies selling the equipment needed to grow the core crop stand to benefit long-term. Enticing Entry Points U.S. sales of medical and adult-use marijuana reached roughly $20 billion in 2020, up around 50% from 2019. Meanwhile, the global market is projected to climb from around $22 billion in 2020 to nearly $100 billion by 2026, with an annual CAGR of 28%. A different legitimate data set expects sales will rise from $24.6 billion in 2020 to over $97 billion by 2026. Given the current legal environment and ad hoc nature, it's reasonable to assume the actual numbers could reach higher. Despite the growth, stock prices of the exchange-listed cannabis companies have experienced several boom-and-bust cycles in their early years on the public markets. The past 12 months alone shines a light on some of the built-in volatility that's also impacted surrounding areas, including hydroponics. For instance, many pot stocks soared following the November election on the hopes a Democrat in the White House would speed up federal legalization efforts. The run continued after the Georgia Senate runoff sweep. Unfortunately, marijuana stocks then got caught in the meme stock mania and skyrocketed far too quickly nearly overnight. This led to an equally fast selloff. The recent beatings and underperformance don't spell doom. Instead, the non-fundamental based moves in 2021 provide opportunities to buy many strong stocks at more enticing levels. And some of the biggest names in hydroponics are currently trading at prices they sat at in the fall of 2020. The Easiest Way to Pursue Big Profits At Zacks, we're monitoring political developments very closely as well as tracking individual stocks. The Senate is on the brink of legalizing marijuana at the federal level after the Senate Majority Leader introduced draft legislation. 37 states have legalized medicinal marijuana. 18 states have made recreational use legal. With the passage of the Cannabis Act in 2018, it's now legal in Canada. Mexico's Supreme Court made private and recreational use legal in June of this year, though specific details of that legislation are still a bit unclear. As a result of these developments, companies within the space are about to take off. Additionally, new ones will emerge and current stocks could skyrocket. For investors, this presents a huge opportunity. This space looks to explode from $24.6 billion in 2020 to $97.35 billion by 2026. Yet only a few growers, pharmaceuticals, financial firms, suppliers - both established and start-ups - are the true innovators and offer exceptional profit potential. So if you don't want to devote constant attention and painstaking analysis to find these often little-known tickers, we can find them for you. Today, you're invited to take part in our portfolio service Zacks Marijuana Innovators. Our approach is responsible and vigilant, but we look for aggressive growth. Recently, we closed a +147.0% trade in Innovative Industrial Properties. Now we're riding gains as high as +93.03% and +133.33%.¹ And all of these could have a long way to run. This is your chance to follow the live buys and sells inside Marijuana Innovators and you can be among the first to get in on the new buys that I'm lining up. But we can't let everyone in, so your chance to gain access must end at midnight this Sunday, September 5. Sorry, no extensions. See Zacks' Marijuana Innovators Trades Now » Good Investing,
For Zacks, Ben Rains focuses on large-cap technology companies and consumer-facing stocks. He currently helms the Marijuana Innovators trading service, searching for the latest strategies to expose investors to the growing legal market in the U.S. and beyond. Ben uses his extensive experience and concentrated industry study to help direct our unique portfolio service, Zacks Marijuana Innovators. | ||||
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| ¹As of 8/30/2021. The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. This free resource is being sent by Zacks.com. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms of Service". https://www.zacks.com/terms_of_service Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research is not a licensed securities dealer, broker or US investment adviser or investment bank. The Zacks #1 Rank Performance covers the period beginning on January 1, 1988 through June 28, 2021. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank #1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance_disclosure for information about the performance numbers displayed above. Zacks Emails Zacks Investment Research |
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