Though all eyes have been on the tech sector for more than a year, it’s cannabis that might offer the greatest growth opportunity for investors through the end of the decade.
Although estimates vary wildly — as we’d expect from an industry that’s operated illicitly for decades — sustainable double-digit growth is the expectation. New Frontier Data has forecasted 21% average annual sales growth between 2019 and 2025 in the U.S., which would lead to more than $41 billion in yearly revenue by mid-decade. Meanwhile, cannabis-focused research firm BDSA expects Canadian pot sales to more than double from $2.6 billion to $6.4 billion between 2020 and 2026.
This rapid growth, coupled with the general favorability of cannabis by the younger generation, is precisely why millennials on online investing app Robinhood have piled into marijuana stocks.
Robinhood takes the buzz out of investing in cannabis
Unfortunately, Robinhood investors are faced with a mammoth pitfall inherent in the platform: over-the-counter stocks are off-limits. Robinhood’s online investing platform offers free commissions, but investors are only allowed to purchase stocks that are listed on the major U.S. exchanges.
One of the odd quirks about investing in marijuana is that neither the New York Stock Exchange (NYSE) nor Nasdaq will allow companies that directly deal with the cannabis plant in the U.S. to list their shares. That’s because marijuana is still an illicit substance at the federal level, even though close to three-quarters of all U.S. states have given marijuana the green light in some capacity. This means direct players in the most lucrative cannabis market in the world are relegated to the over-the-counter exchange. In other words, Robinhood investors can’t buy them.
By comparison, Canadian pot stocks are allowed to list their shares on the NYSE and Nasdaq, with the caveat being they stay out of the U.S. marijuana industry as long as it remains illegal at the federal level. The problem is that the Canadian weed industry is wrought with regulatory and supply issues, leaving Robinhood investors to choose between poor-performing Canadian pot stocks and avoiding the industry altogether.
But there’s good news. There are two smart ways Robinhood investors can still participate in the green rush without having the leave the platform.
Buy a U.S.-focused marijuana ETF
The absolute smartest workaround to being unable to invest in U.S. multistate operators (MSO) on Robinhood is to buy the exchange-traded fund (ETF) focused exclusively on U.S. marijuana stocks: AdvisorShares Pure U.S. Cannabis ETF (NYSEMKT:MSOS).
The AdvisorShares Pure U.S. Cannabis ETF currently has more than $1 billion in net assets and holds stakes in 31 companies. The vast majority of the funds’ invested holdings (almost 86%) are devoted to MSOs — i.e., companies that control the cultivation, processing, and retail sale of pot products in the United States. MSOs happen to be the fastest-growing group of companies within the U.S. weed industry.
For example, the largest holding in the fund, Curaleaf (OTC:CURLF), accounts for 12.1% of current portfolio weighting. As of the beginning of June, Curaleaf had 106 operating dispensaries, as well as a retail, cultivation, or processing presence in 23 states. Following its acquisition of top-notch pot brand Select and privately held MSO Grassroots last year, Curaleaf is on track to be the first pot stock to hit $1 billion in sales. If Wall Street’s forecast is correct, it could be pushing above $3 billion in annual revenue by 2024.
You’ll also gain access to the likes of Trulieve Cannabis (OTC:TCNNF), the funds’ third-largest holding. Trulieve recently reported its 13th consecutive quarterly profit. The company’s success is a function of its laser focus on medical marijuana-legal Florida. Out of 88 operating dispensaries, 82 are located in the Sunshine State. Saturating Florida has helped raise brand awareness and keep Trulieve’s marketing costs down. With the buyout of Harvest Health & Recreation pending, Trulieve will soon be rivaling Curaleaf in size.
Stick with high-performance ancillary pot stocks
If marijuana ETFs aren’t your thing, Robinhood investors have one other smart option at their disposal: ancillary U.S. pot stocks. Ancillary cannabis businesses don’t come into direct contact with the plant, but are nevertheless instrumental to the growth of the weed industry.
A perfect example of a successful ancillary marijuana stock is Innovative Industrial Properties (NYSE:IIPR). Innovative Industrial, or IIP for short, is a cannabis-focused real estate investment trust (REIT). It acquires medical marijuana cultivation and processing assets in the U.S. with the intent of leasing these properties out for long periods of time.
As of the beginning of June, it owned 72 properties spanning 6.6 million rentable square feet in 18 states. All of IIP’s properties are fully leased out, with a weighted-average lease length of 16.8 years. It’ll probably take less than half this time for Innovative Industrial Properties to completely recoup the $1.6 billion it’s invested.
What’s more, IIP’s sale-leaseback program has been popular among MSOs. With cannabis banking reform stalled in Congress, MSOs have turned to IIP to raise capital. Under its sale-leaseback agreements, IIP buys cultivation or processing facilities for cash and immediately leases the property back to the seller. It’s a highly profitable and predictable program for the company.
Another ancillary stock with plenty of upside potential is GrowGeneration (NASDAQ:GRWG). GrowGeneration operates a chain of 55 hydroponic and organic garden centers in a dozen U.S. states. These stores sell everything from hydroponic equipment (growing plants in a nutrient-rich water solvent) to soil, lighting, nutrients, and pest solutions. In short, GrowGen aims to help cultivators maximize yield and minimize pests.
Although GrowGeneration won’t be able to grow by a triple-digit percentage every year, its management team hasn’t been shy about using acquisitions to expand its reach into new markets. In particular, the company now has 20 stores in California, the largest marijuana market in the world.
If Robinhood investors want to take advantage of the cannabis craze, they should ditch the underperforming Canadian pot stocks and consider either ancillary weed stocks or the aforementioned AdvisorShares Pure U.S. Cannabis ETF.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.