Invest Carefully in Rosy But Risky Marijuana Industry

The marijuana industry has strong potential especially after legalization for recreational and medicinal use. Moreover, the industry is enjoying benefits of expansion into other industries like food, beverage, tobacco and cosmetics.

The much-awaited Cannabis Banking Bill was finally passed by the House Financial Services Committee on Mar 28. This opens up avenues for legal and effective financing for marijuana companies in the United States.

However, investors should be careful as several stocks of this industry have already skyrocketed even as the industry has been tagged as highly volatile.

Cannabis Banking Bill: A Key Catalyst

On Mar 28, the House Financial Services Committee voted 45-15 in favor of passing the Secure and Fair Enforcement Banking Act of 2019 or the SAFE Banking Act. The bill seeks to safeguard the process of financial lending to cannabis companies in the United States. This would not only protect the industry’s credit lines but also aid cannabis ancillary industries in the country. The ancillary sector has been suffering from financial uncertainties associated with the legal status of marijuana in the past.

Cannabis is getting approval from many U.S. states for recreational uses, in addition to medical usage. Though pot remains entirely illegal at the federal level, currently 47 U.S. states offer some form of legalized marijuana for sale.

Strong Market Potential

Research firm Euromonitor has estimated that the American market for legal marijuana products will reach $20 billion by 2020 from a mere $5.4 billion in 2015. According to the Arcview Market Research, the U.S. legal cannabis market is expected to reach $23 billion by 2022. Research firm Cowen projected that the market size of the U.S. legal cannabis industry will reach $75 billion in by 2030, surpassing the carbonated soft drink market in 2017.

Per a study conducted by Colorado cannabis consulting firm Freedman & Koski, Illinois’ annual marijuana market could be between $1.69 billion and $2.58 billion. Overall, U.S. consumer spending on legal cannabis is expected to reach $22.2 billion by 2022, while Canadian spending is estimated to hit $5.9 billion, per a January report by Arcview Market.

Extremely Volatile Industry

The marijuana industry is considered extremely volatile. Most of these companies are in their early stages of development and characterized as risky for investors. Even a minor negative development may cause major stock price fluctuations.

Notably, in October 2018, the news of supply shortages resulted in panic selling as investor’s look to offload risky stocks. According to some industry experts, 5-10% share price volatility daily should not be considered as unnatural for this industry.

Potential Winners

Cannabis stocks are solid long-term bets. Of these, stocks with a Zacks Rank #3 (Hold) or better and solid long-term growth potential are worth trying out despite the latent risks. We have narrowed down our search to five such stocks.

The chart below shows price performance of our five picks year to date.

GW Pharmaceuticals plc GWPH a biopharmaceutical company, focuses on discovering, developing, and commercializing cannabinoid prescription medicines using botanical extracts derived from the Cannabis plant. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company has an expected earnings growth rate of 20.5% and 64.5% for the current quarter and next year, respectively. The Zacks Consensus Estimate for the current quarter and next year has improved 0.4% and 6.7%, respectively, over the last 60 days. The stock has surged 73.8% year to date.

Innovative Industrial Properties Inc. IIPR is focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities.

The stock carries a Zacks Rank #3. The company has an expected earnings growth rate of 94% and 56.9% for the current and next year, respectively. The Zacks Consensus Estimate for the current and next year has improved 0.4% and 4.9%, respectively, over the last 60 days. The stock has surged 87.5% year to date.

Canopy Growth Corp. CGC engages in growing, possession, and sale of medical cannabis in Canada. Its products include dried flowers, oils and concentrates, softgel capsules and hemps. The stock carries a Zacks Rank #3. The company has an expected earnings growth rate of 41.9% and 57.9% for the current quarter and next year, respectively. The stock has surged 88% year to date.

Aurora Cannabis Inc. ACB produces and distributes medical cannabis products. It is vertically integrated and horizontally diversified across various segments of the cannabis value chain. The Zacks Rank #3 stock has surged 83% year to date.