The marijuana industry had an eye-opening 2018.
To our north, Canada became the first industrialized country in the world, and only the second country overall, to legalize recreational cannabis. Although it's going to take some time for capacity to ramp up enough to meet demand, the end result is this will translate into billions of dollars in added annual sales for the legal weed industry. Even more so, it brings legitimacy to an industry that was otherwise considered taboo.
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Then, in the U.S., a handful of states legalized pot in some capacity, with the U.S. Food and Drug Administration approving the very first cannabis-derived drug.
But in spite of this gained validity, marijuana stocks plummeted. Though they were up modestly by mid-October, a majority of pot stocks had seen declines of 30%, 40%, or more than 50%, by the end of the year. With risks aplenty piling up, the case could be made to avoid pot stocks.
Get a secondhand high with these time-tested businesses
Of course, it's hard to overlook the industry's potential. With North American legal weed sales totaling $9.7 billion in 2017, but on pace to reach $47 billion by 2027, according to cannabis research firm ArcView, there are bound to be winners.
So, what should skittish investors do? My suggestion would be to set yourself up for success with time-tested businesses that are only partially reliant on the cannabis industry, yet can still benefit from its rapid growth. There are three such stocks that fit the bill (or should I say "bud?").
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Scotts Miracle-Gro
An easy way to quickly pick up exposure to the marijuana industry without a lot of risk is to consider a company like Scotts Miracle-Gro (SMG +4.64%).
Most folks probably know Scotts best for its lawn and garden products. The company's core operations have always been to aid retail consumers looking to improve the aesthetics of their property, and enterprise customers wanting to improve their yield of their crop. In fiscal 2018, this core business brought in $2.11 billion.
However, the company also generated $344.9 million in sales, or 13% of total revenue, from its Hawthorne Gardening subsidiary, which supplies hydroponic, lighting, soil, and nutrient solutions to the cannabis industry to improve crop yield. As more and more U.S. states have legalized weed, the potential market for Scotts' subsidiary has blossomed.
This year was especially transformational for Scotts Miracle-Gro, after it acquired Ohio-based Sunlight Supply in a cash-and stock deal worth $450 million. Sunlight Supply retails many of the same hydroponic products as Hawthorne, but helped broaden its product portfolio to reach more small and medium-sized businesses. Combining the two companies should also result in at least $35 million in peak cost synergies.
Ultimately, Scotts is aiming to double its exposure to the cannabis industry, but still has its moneymaking lawn and garden segment to lean on if the marijuana industry encounters growth issues.
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Cree
Another interesting consideration would be LED light and lighting-system company Cree (CREE +0.00%).
Why Cree? Historically, marijuana growers have relied on high-pressure sodium (HPS) lights for their crops. These lights produce very predictable results and costs, which growers tend to appreciate. But HPS lights also have drawbacks. These include the generation of a lot of heat, which requires the installation of cooling systems to regulate the ambient temperature of a grow room, as well as substantial electricity costs that can make any growers' jaw drop when they receive their electric bill.
Thus enters the Cree LED bulb, stage left. Cree's LED lights produce far less heat than standard HPS bulbs, and they also us substantially less electricity. That's a win-win for growers in terms of utilizing less electricity via the bulb and less strain on the cooling system.
The downside, though, is that not all growers understand the yield potential of LED lights. The up-front costs for LED bulbs are also much higher than HPS bulbs, but that gap is expected to lessen over time as the manufacturing process improves. In other words, Cree could find that a rapidly growing minority percentage of its enterprise revenue is derived from cannabis companies.
For the time being, Cree doesn't break out what percentage of its sales are tied to marijuana businesses. But it did report 13% sales growth in its most recent quarter -- and I don't doubt that this double-digit sales growth is at least partially influenced by pot industry demand.
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Shopify
A final way for investors to gain secondhand exposure to the marijuana industry is via the cloud-based software-as-a-service behemoth Shopify (SHOP 2.04%).
Shopify has been making a name for itself long before legal cannabis became the talk of the town in 2018. Shopify's online platforms are responsible for connecting retailers with their suppliers and consumers. The data gathered by Shopify's platform can aid with reordering and, most importantly, can help businesses better understand what their consumers are buying.
As it relates to the cannabis industry, Shopify's e-commerce platform is the choice of the Ontario Liquor Control Board for brick-and-mortar, online, and mobile sales within the province. In June, the company inked a similar deal with British Columbia that'll see its platform act as sort of a middleman between private retailers and growers. Shopify's solutions help retailers manage their orders and, as noted, will help an industry that's been reliant on cash better understand its customer base for the first time ever.
According to the company's most recent quarterly operating results, sales grew by an impressive 58% to $270.1 million, with merchant solutions growing by 68%, to $149.5 million. It's worth noting that Shopify doesn't break out what percentage of its business is tied to marijuana, but it clearly has skin in the game of a rapidly growing industry. You'll certainly pay a premium for this growth, but it could be well worth it.
