A Review of Marijuana Stocks in the United States
The marijuana industry in the United States is a relatively new yet rapidly expanding market due to the recent legalization in individual states. As further information continues to come out, and as the medical and recreational benefits become more evident, the debates around the legal stance ofmarijuana in America have never been as heated. The assumptions for nationwide acceptance are rising, and as cannabis legalizes across the United States, this industry will start to grow larger at an exponential rate. Consequently, there will be ample upside if caught early, thus creating very lucrative investment opportunities.
Comparing reports and arguments across political, legal, social, and economic sectors points towards full nationwide legalization in the United States within the next 4-9 years. Within this time frame, the United States marijuana industry is estimated to grow an average of 600%. Given the size of the legal marijuana market today, compared to the current black-market and the future growth over the next few years as it legalizes, the opportunity to monetize is prime.
Zynerba Pharmaceuticals, Inc. (ZYNE)
Zynerba Pharmaceuticals, Inc. is a United States pharmaceutical company that focuses on innovative cannabinoid treatments. Recently, the company’s focus has been on a new procedure where the product itself is a cannabis-infused skin cream (Zynerba, 2018). This product delivers the cannabidiol (CBD) effects from cannabis, which carries most of the medicinal properties, and is the first cannabis-infused medicine to use skin as the medium of entry. Ultimately, this company has created a way to utilize the therapeutic benefits of marijuana without feeling the effects of the THC, or ‘high,’ all through a skin cream application.
While the concept itself is impressive and has passed early-stage testing, the part of the company that makes it such a lucrative investment is the patent on this drug. They patented not only the drug itself but also the delivery method of CBD properties through a skin cream. Essentially, Zynerba owns the rights to any cannabis-infused medicine to be applied via a skin cream, which is extremely valuable in the pharmaceutical realm given the issues with alternative methods such as smoking or pills (Zynerba, 2017). As with the pharmaceutical industry in general, acquisitions and patent buyouts are very common, and I firmly believe this company could be subject to either. My investment is not into the company, but instead into the potential gain that will occur from the value of their patent. As medicinal marijuana becomes more accessible in the United States, the amount of this patent will become more widely recognized and could result in a buyout of some kind.
ZYNE is currently trading near its all-time low. The stock chart does not show any promising sign of it rising soon, the company is running at a loss, the management refuses to pay dividends, and its relative size in the pharmaceutical industry pose volatility and insolvency risk. In addition to this, the company did not have revenue for 2016 or 2017 as they were exclusively working on the release of this patented drug. Everything about this company screams disaster when you look at the books, but the beautiful diamond in the rough is the patent. While this value is open to speculation, given how these drugs regularly wipe out millions/billions in currently available medicines, one can expect the license to go for around a conservative $250 million mark. This value comes from both the dramatic increase in demand for cannabis-infused medicine, as well as all the revolutionary concept of this delivery method. If the patent were to be recognized at a value of $200-$300 million, the implied stock return of this is around 290% from today’s price and a price target of $14.35.
Scotts Miracle Gro-Co (SMG)
Scotts Miracle Gro-Co (SMG) is considered an industry leader in the lawn and garden market. While this may not seem to be the most lucrative investment, or quite frankly an exciting industry, SMG has made notable efforts to soon become a significant player in the marijuana industry (Speights, 2017). According to financial analyst Adam Jones, “with the increase in cannabis legalization for recreational purposes in the United States and Canada, [Scotts Miracle Gro-Co] has acquired companies that can serve the needs of cannabis growers through technologies related to indoor gardening” (Jones, 2017). Already holding a strong reputation, a significant cash flow, and nearly all of the supplier side resources, SMG has the ability to not only pivot and cater to the growing of cannabis plants, but has the potential to be the leader of this sector. This company has the capital and the resources, as well as the vision and management, to become a front-runner in the supply-side of the marijuana industry.
Becoming the forefront of this market that is expected to break over $50 billion in value, allows for a very profitable opportunity if even grabbing a small percentage of market share. If Scotts Miracle Gro-Co were to catch just 4% of the entire marijuana industry, which would roughly be $2 billion in market share in 8 years, this would more than triple their current annual revenues. Assuming an accelerated growth of the industry over the later years of legalization, Scotts Miracle Gro-Co could double their income over the next five years. If SMG were to do so over this timeframe from marijuanaalone, we could see a similar reflection in stock price, putting targets anywhere from $200-250–generating a return of roughly 135.84% to 194.81%.
22nd Century (XXII)
22nd Century is a biotechnology company based in the United States (Forbes, 2017). 22nd Century is most commonly known for their cigarettes that have minimal nicotine, marketing them as cigarettes that help you stop smoking. This cigarette is similar to the proven concepts of nicotine patches, where you reduce the amount of nicotine received each day until one can fight the addiction, and in fact, doctors medically prescribe these cigarettes to those trying to quit (Forbes, 2017). The company has always been represented as a healthier alternative to traditional cigarettes, but they have been recently in the works to establish that status in the marijuana community as well; CBD marijuana joints. The company recognizes that the most significant issues with individuals using medicinal marijuana are the physical high and legal implications. This new product is intended to allow people to legally enjoy the therapeutic benefits without the euphoric effects from the THC (Fortune, 2017).
Relevant companies are heavily investing in the market of splitting THC properties from CBD properties–and CBD, in general, has been on an increasingly relevant health trend as it becomes more widely available. 22nd Century, having captured part of the industry bt starting production for their product, and a robust visionary team, 22nd Century has excellent potential to become a widely recognized brand in the future of the cannabis industry.
XXII is currently trading at half of its all-time-high, performing at a loss over the last three years, and holds a relatively low market capitalization at just over $350 million. While structured around a demanded solution, big players in the tobacco industry still dominates this company. Instead, XXII should focus on brand awareness and expansion. However, entering a new space with a new product has its benefits, and may give 22nd Century the edge to move from a multi-million dollar company to a billion dollar company. The possibility of this could come from capturing 2% of the marijuanamarket in 8 years, adding roughly $1 billion in value to the company. Between the growing marijuana market and the current sales of their healthier cigarettes, a valuation of $1 billion is attainable within five years. With a $1 billion valuation, the adjusted price target would be 8.06 with implied returns of 238.66%
Innovative Industrial Properties, Inc. (IIPR)
Innovative Industrial Properties, Inc. has a straightforward business model. While it is currently illegal to get a mortgage from a bank on land with the intent to grow cannabis plants, Innovative Industrial Properties, Inc. buys out land perfectly suitable for growing cannabis and leases them out on 15-year contracts to those wanting to grow (Innovative Industrial Property, 2017). Focusing on expanding the accessibility of medicinal marijuana, they “offer real estate solutions that allow [medicinal-use cannabis cultivators and processors] to focus their resources on reaching as many patients as possible (Innovative Industrial Property, 2017). Recognizing the problem, and coming up with a very stable and lucrative solution, makes this company attractive, and having the mission to expand medicinal marijuana to as many people as possible, draws one towards the management. While the company is relatively small and currently not profitable, I believe they are on track to grow extraordinarily large given their steady business model. As both the industry and their cash flow growth, they will be able to acquire more land and lease it out to more buyers, while becoming an exponentially growing leader in this sector.
As the company has chosen to pay out dividends, I assume the management is confident in their long-term deals. Given their business model revolves around the marijuana industry, we will assume the company’s growth over the years to reflect their market share in the marijuana market. Innovative Industrial Properties, Inc. attempts to be a frontrunner in the real-estate side of marijuana could see a modest 1-2% of market share if becoming large enough in the future. This growth would result in $500 million-$1 billion in added value over the next eight years. Assuming an accelerated growth in the industry, over the next five years we can see $250 million in value added to IIPR. The implied price target and returns would be 67.45 and 120.51% respectively.
The investments suggested do not equate to a guarantee of profits and additional independent research should accompany them.
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Written by Ravi Melwani & Edited by Albert Daniel Shub