High Profits for the Taking

In today’s Money Morning…risk and opportunity in a new industry…how to invest when the big brands come for marijuana…the type of stock that ignores downturns…and more…

I came across a statistic that surprised me over the weekend.

According to Live Science…

‘Marijuana’s popularity among American adults is on the rise — and use of the recreational drug is expected to continue to increase, according to several surveys.

Forty-five percent of adults in the U.S. have used marijuana at least once in their lives, according to a Gallup poll released in mid-July — the all-time highest percentage in the 48-year history of Gallup asking Americans this question.

Consider the fact that only 1 in 5 Americans smoke cigarettes.

This is big news for anyone considering an investment in the hyped-up marijuana industry.

It shows there’s some substance behind it all (no pun intended).

I’ll be honest, I was a bit sceptical about this industry earlier in the year. But recently I’ve delved a bit deeper into the investment opportunity.

And I’m starting to like what I see.

The initial boom in marijuana stocks has faded from the March highs earlier this year. And investors now have a second chance to get into some compelling stocks at lower levels.

If the story plays out as I expect, these could look like bargain prices a year from now.

Let’s look at some trends I expect to see drive valuations in this growing industry (OK that one was intended).

Recreational legalisation

Recreational marijuana use is currently illegal in most countries around the world. Though the law varies according to factors such as personal use and quantities in possession.

In fact, Uruguay is the only country I could find where it was completely legal to grow, sell and use marijuana, without any restrictions.

However this could be set to change…

Canada is leading the way. It’s set to legalise recreational marijuana use early next year. This will open up an estimated C$5b per annum market.

In the US, marijuana is illegal under federal law, but 30 states and the District of Columbia have legalised it for medical or recreational purposes.

The trend of support in western countries is increasing. And each new announcement acts as a catalyst for marijuana stock price growth.

Brand emergence

As the industry becomes more legit, I expect to see the emergence of popular brands.

If you look at the cigarette and alcohol industries for example, you see the effect of marketing in turning a general commodity into a distinct and valuable brand.

And marijuana has many features that savvy marketers will use to stand out from the crowd.

So don’t think of these stocks as investments in ‘farmers’. Think of them as investments in companies with the potential to be a Phillip Morris, or British American Tobacco.

Big brands, with big value.

Industry consolidation

As deep-pocketed investors enter the legal pot landscape and competition grows, smaller operations are more likely to merge or fold into larger companies.

Again, the cigarette industry provides the template for how this industry will probably develop.

‘Big tobacco’ is a phrase often used to describe the five biggest tobacco industry companies, which together make up around 60% of the world market.

The economics of the marijuana industry will reward the biggest and fastest growing firms.

Investors benefit greatly in times of industry consolidation as company valuations are bid up by eager buyers.

What should investors do?

No doubt this is a good opportunity. But there are still risks.

For example, pot prices could fall rapidly as more growers come in to satisfy demand.

There will be winners and losers, and it will pay to spread any marijuana investment around the most promising names, to reduce risk.

Do your research, as not all marijuana stocks are created equal. Some are just copycats, riding on the coattails of the hype.

Lastly, if you’re a bit worried about the economic future, this is one industry that will be unaffected by a recession.

It’s one of those all-weather industries, like McDonalds, that thrives in downturns as well as normal times. That makes it a particularly good investment in today’s volatile times.

Good investing,

Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia