Pot Stocks: How One Tiny Company’s Revenue Could Explode

Now that 15 pot stocks have made it onto the Nasdaq â€” with yesterday’s addition of Organigram (NASDAQ:OGI) — smart investors are already wondering: Which will be the next cannabis company to get called up to the big leagues?

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I’ve got my theories. But there’s one factor that’s almost as important as a company’s ability to “uplist” to a major stock exchange …

… and that’s its business model.

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So today I want to talk about a little-known phenomenon that’s allowing tiny pot stocks to become “revenue machines.”

It’s actually a bit of a misnomer to call them “pot stocks” at all. They’re more like Royal Gold (NASDAQ:RGLD) — one of the most profitable companies in investing history.

If you’re not familiar with Royal Gold, it was founded in the early 1980s by Stanley Dempsey … a man who never discovered a single ounce of gold — but still got very wealthy from gold mining.

Dempsey was a geologist, so gold mining was a natural fit. Yet after a few long months, his new company had burned through lots of money, and hit nothing but dirt. That was all just to identify a target gold deposit — and then you add in land, labor, insurance, permits, not to mention the expensive gold mining equipment.

Luckily for Royal Gold, Dempsey was also a lawyer … a clever one at that. And he saved the company by pulling an ingenious legal maneuver. Rather than spend the remaining cash on further exploration, Dempsey invested it with more knowledgeable, experienced gold miners. These seasoned pros would do the exploring. And Royal Gold would receive a cut of the proceeds.

In the end, these royalty payouts became hugely lucrative:

Royal Gold’s first $1 million deal was for a project in northeastern Nevada. In return, the miner owed them 20% of the proceeds, for the life of the mine.

In the first year, Royal Gold received $9 million. Year Two brought another $8 million. Year Three brought $12 million. All in all, $170 million has come in. That’s a 16,900% return on Dempsey’s original $1 million.

The company is still collecting on that investment — and many more.

Naturally, the Royal Gold story brought a lot of imitators:

Franco Nevada (NYSE:FNV) is a similar business in gold royalties. Early investors could have turned $1,000 into $453,000. Wheaton Precious Metals (NYSE:WPM) does the same thing with silver. That one’s up more than 1,200% since inception. Sabine Royalty Trust (NYSE:SBR) does it with oil. Shares enjoyed as much as a 10,200% climb, including dividends.

And for these royalty companies, it’s virtually all revenue — no costs.

Why Do I Tell This Story?

Because when you hear all this news and chatter about marijuana, you’ve got to remember one thing:

At the end of the day, it is not a pastime … not a lifestyle … or a “magic cure.” Cannabis is a commodity.

Just like coffee, for example. Coffee is a $48 billion business in the United States. But marijuana will be much larger even than that.

As legalization spread from state to state, legal marijuana sales jumped 33% from 2016 to 2017 — $10 billion that year alone. With more states and Canada legalizing recreational marijuana, sales are expected to grow by another nearly 150% by 2021.

I believe marijuana could grab a lot of market share from cigarettes and alcohol. There is nobody debating the negative effects of smoking cigarettes, and the United States has a major issue with binge drinking among the younger generation. Both vices are on the downslope, and it is creating the perfect opportunity for marijuana to step into the gap.

By 2030, research firm Cowen predicts, we’re looking at marijuana being a $75 billion industry. That’s about where cigarettes are today ($77 billion) and encroaching on beer ($110 billion). And that’s just the first 15 years of this multifaceted, wide-ranging trend.