Motley Fool Top MJ Picks for 2019 Understanding the marijuana industry
Before buying any stock, it's important to understand the underlying business. And the marijuana industry is more complex than it might seem at first glance.
First, there are key geographic considerations. Canadian pot stocks have received the most attention from investors over the past few years. That makes sense, with Canada's mature medical marijuana market and the country's heavily anticipated legalization of recreational marijuana in 2018. As a result of these factors, the world's largest marijuana producers are based in Canada.
But Canada will generate less than 12% of the total marijuana sales worldwide in 2019, according to estimates from Arcview Market Research and BDS Analytics. The U.S. is and will continue to be where the most money is made for the marijuana industry, with nearly 80% of global marijuana sales in 2019.
There are also different areas of focus within the marijuana industry, resulting in different types of marijuana stocks. The three main kinds of marijuana stocks are:
- Marijuana producers.
- Ancillary products and services providers.
- Cannabis-focused drugmakers.
Marijuana producers represent the most pure-play way to invest in marijuana stocks. These companies cultivate marijuana (often in indoor facilities and greenhouses), produce cannabis products, and distribute the products to customers.
Ancillary products and services providers don't grow cannabis plants themselves. Instead, these companies supply the products and services needed for marijuana growers and others in the cannabis industry to conduct their business successfully -- from fertilizer and lighting systems to distribution and financing.
Cannabis-focused drugmakers include any biotech or pharmaceutical company that specializes in developing prescription drugs based on ingredients from the cannabis plant called cannabinoids. These companies conduct clinical testing of these cannabinoid drugs and market the products after receiving U.S. Food and Drug Administration approval or regulatory approvals in other countries.
What to look for in marijuana stocks
The two key things to look for in marijuana stocks are similar to what you should look for in any stock: growth opportunities and the ability to capitalize on those opportunities.
Growth opportunities are pretty easy to find for most marijuana stocks. More countries around the world are legalizing medical marijuana. More U.S. states are doing so as well, with several also legalizing recreational marijuana.
However, pay close attention to the geographical regions where specific marijuana stocks can operate. Some Canadian marijuana stocks, for example, can't conduct business in the U.S. and maintain their listings on major stock exchanges as long as the sale of marijuana remains illegal at the federal level in the United States.
Determining how well a given marijuana stock can capitalize on its growth opportunities isn't as easy. For marijuana producers, capacity -- typically measured in kilograms of cannabis that can be grown on an annual basis -- and distribution channels make a big difference in how much companies can grow. Potential competition is a factor for all types of marijuana stocks.
Several marijuana stocks appear to have especially strong growth opportunities and a solid ability to capitalize on those opportunities. Here are the top marijuana stocks meeting these criteria that look like great picks to buy in 2019:
Origin House
Origin House ranks as the top distributor of marijuana products in California. The company distributes more than 50 brands to around 70% of the dispensaries in the state.
The California market gives Origin House a tremendous opportunity for growth. California's legal recreational marijuana market opened for business in 2018. By 2022, the state's total annual marijuana sales should more than double to $7.7 billion -- nearly one-fourth of worldwide marijuana sales. Origin House is poised to profit by distributing many of the top-selling brands.
The company owns several of those brands. Origin House currently generates around 70% of its total revenue from the distribution, with close to 30% of revenue stemming from sales of its own brands, according to CEO Marc Lustig. This mix is likely to shift to a 50/50 split as the company acquires more brands.
Although its core business is in California, Origin House is based in Canada. The company expects to see growth from its home country, too. In September 2018, Origin House acquired 180 Smoke, a leading vaporizer retailer in Canada, with 26 retail locations and solid online retail operations.
Over the long run, Origin House's strategy is to replicate its success in California in other markets. In particular, the company plans to export its brands into additional states in the U.S. and into other countries.
What about potential competitive threats? It won't be easy for another company to dislodge Origin House from its position as the top distributor in California, as long as it does a good job serving its customers and partners.
And while the competition for cannabis brands is intense, Origin House has an edge thanks to its distribution business. The company's data allows it to have a unique insight into which brands perform the best -- and therefore which brands it should acquire. Overall, these advantages make Origin House one of the most promising under-the-radar marijuana stocks on the market.