The botanical industry is much more diverse than you think
During the Trump administration, one commodity strangely sparked consensus in what was otherwise a tumultuous period. That’s right, I’m talking about cannabis! With landmark legislation such as the Agriculture Improvement Act of 2018, colloquially known as the hemp bill, the fundamentals boded very well for cannabis stocks.
During the runup to the 2020 election, now President Joe Biden pledged to decriminalize marijuana. Although it was a tad bit short of full legalization, the overture was well received by proponents of both personal liberties and marijuana stocks. Further, with the Biden administration having the benefit of Democratic control of Congress (albeit a tenuous one), the future looks bright for botanicals.
At the same time, investors need to be realistic about cannabis stocks. Yes, the legislative backdrop continues to support the concept of legalization, with even conservative states warming up to acceptance of the plant to various degrees or conditions. Yet the marijuana investment market hasn’t been the most stable, irrespective of the encouraging ecosystem.
This is why prospective buyers who are bullish on cannabis stocks should consider companies that offer a diversified take on the industry. These include companies that offer traditional cannabis-based solutions but other products as well. And they might not even be marijuana firms at all but provide necessary services for the industry. Some of these names include the following:
- Scotts Miracle-Gro (NYSE:SMG)
- AbbVie (NYSE:ABBV)
- Pfizer (NYSE:PFE)
- Constellation Brands (NYSE:STZ)
- cbdMD (NYSEAMERICAN:YCBD)
- Innovative Industrial Properties (NYSE:IIPR)
- Village Farms (NASDAQ:VFF)
Lastly, the market is turning quite volatile recently. That might hurt pure-play marijuana stocks, which are largely speculative. By expanding your horizon, these companies will get you some exposure to cannabis while providing coverage for other relevant industries.
Scotts Miracle-Gro (SMG)
Technically not a classic among cannabis stocks, Scotts Miracle-Gro is nevertheless an important name in the botanical industry. Featuring a variety of gardening resources and hydroponic solutions, Scotts is a brand people trust for non-controversial projects, as well as the more adventurous side of the gardening sector.
Better yet, the general banality of SMG stock is what makes it so appealing. If you have a robust portfolio of marijuana stocks, chances are, you’re levered to some of the sexier names in the green market. But you likely won’t go wrong with adding Scotts Miracle-Gro in there considering its diverse exposure to several relevant uses.
You know what? It’s not too shabby on the performance end either. Over the trailing year, SMG stock is up 128%. On a year-to-date basis, we’re looking at nearly 20% up. Since we don’t know what’s going to happen with the cannabis environment, Scotts offers a solid safety valve.
Another company that’s technically a non-cannabis brand, I’m going to include AbbVie anyways on this list of marijuana stocks. A few years ago, green-friendly investors added ABBV stock to their portfolio on the basis of Marinol, a cannabinoid indicated in adults for anorexia and associated with weight loss in patients with AIDS.
However, at the end of 2019, Alkem Labs acquired Marinol from AbbVie in a $10 million deal. Nevertheless, if you’re looking for business diversity in your cannabis stocks, ABBV remains an equity unit to consider. That’s because in the year that it sold Marinol, it had 59 cannabis patents, far more than second-place holder Sanofi (NASDAQ:SNY) at 39 patents.
Logically, this indicates that management sees substantial value in medicinal marijuana research. Plus, as a diversified opportunity, I especially like ABBV stock for the underlying company’s acquisition of Botox. Once we’re fully recovered from this pandemic, shares could see significant upside from increased demand in elective procedures.
If you didn’t know the brand Pfizer before the novel coronavirus pandemic, you certainly know it now. Along with Moderna (NASDAQ:MRNA), Pfizer was on the frontlines of the vaccine race, developing a messenger-RNA-based solution. Thanks to the approach’s rapid-fire manufacturing capabilities, PFE stock enjoyed an appeal that it really didn’t receive for a long time.
But as a play on cannabis stocks? Have I lost my mind? This is one that surprised me, but Pfizer currently has “25 U.S. patents for molecules relating to the cannabis plant.” As with big pharmaceutical rival AbbVie, Pfizer apparently sees significant value in medical marijuana and has enough confidence in its upward trajectory to fork over some research and development dollars.
If you’re gung-ho on marijuana stocks, PFE isn’t going to light up the leader board anytime soon. However, it’s an interesting play on diversification. Should the Covid-19 crisis worsen, Pfizer could cynically rise higher. And if not, the company might start directing more effort on its botanical resources.
Constellation Brands (STZ)
An excellent candidate among vice-related investments, Constellation Brands offers a multi-faceted take on cannabis stocks. Primarily, Constellation is a beverage conglomerate best known for Corona (not virus). But weed investors know STZ stock because the underlying company has a significant stake in Canopy Growth (NASDAQ:CGC).
True, you can just get shares of Canopy to get more direct exposure to the cannabis side of the equation. However, marijuana stocks have been on the shaky side as of late. For instance, for most of March, CGC has traded below its 50-day moving average, which is not a great sign if you’re a proponent of technical analysis.
While Canopy outperforms STZ stock on a YTD basis, the latter at time of writing is trading above its 50 DMA. This suggests more stability for Constellation’s business, which is centered on alcoholic drinks.
But on the cannabis side, Constellation offers Canopy a strategic partnership as CGC attempts to break into the U.S. cannabidiol (CBD)-infused beverage market. This is an interesting space that investors should watch closely.
As the name suggests, cbdMD focuses exclusively on CBD so you’re not going to find non-cannabis-related products here. However, I still include it on this list of diversified cannabis stocks because of the myriad options that the underlying compound opens up. Go to cbdMD’s website and you’ll find virtually every product you need for overall health and wellness, ranging from tinctures to sleep aids to bath products.
Interestingly, when I first covered YCBD stock, the underlying company endorsed a few notable names, most prominently two-times Masters champion Bubba Watson. This effectively demonstrated the confidence that cbdMD places in its broad spectrum CBD products — if Watson got pinged for a positive drug test result, YCBD would presumably suffer badly.
Today, the company has added many more athletes to its roster, including one of my favorite mixed-martial arts fighters Chael Sonnen. Featuring the CBD Recover anti-inflammation cream, if it works for a cage fighter, I’m sure it also works for keyboard commandos.
Plus, Sonnen might put you into a rear naked choke hold if you don’t buy YCBD stock so that’s another good incentive to consider shares.
Innovative Industrial Properties (IIPR)
Consistently one of the top-performing cannabis stocks over the last several years, Innovative Industrial Properties is a botanical business that focuses on the other kind of green products. Structured as a real estate investment trust (REIT), Innovative Industrial provides real estate capital to the medical-use cannabis industry.
As a REIT, IIPR stock is a very shareholder-friendly opportunity. That’s because the underlying company must distribute through a dividend at least 90% of its taxable income. I suppose there’s some controversy with this business model in that it might focus too much attention on shareholders and not enough on growing viable enterprises.
I look at it this way — years ago, too many players were focused on outright growth and not on sustainability. Through the turbulence, IIPR stock generally performed well because management made sensible decisions, not emotional ones.
Moving forward, this disciplined approach is exactly what you need with this sometimes chaotic market. Moreover, we don’t know which specific cannabis firm will stick around. However, as long as the industry remains relevant, there will always be a need for business capital, making IIPR stock a compelling idea.
Village Farms (VFF)
According to the website of Village Farms, the company claims to be “one of the largest and longest-operating vertically integrated greenhouse growers in North America and the only publicly traded greenhouse produce company in Canada.” Primarily, its business revolves around producing and distributing fresh, premium-quality produce.
And no, don’t look to get high on Village Farms’ tomatoes, cucumbers and peppers — they really are just that.
But where VFF stocks gets interesting for those seeking a multifaceted approach to their cannabis stocks is the underlying company’s ambitions for the U.S. hemp-derived CBD market. On Village Farms’ investor relations page, it notes that the firm has “established a joint venture, Village Fields Hemp USA, LLC, for multi-state outdoor hemp cultivation and CBD extraction and plans to pursue controlled environment hemp production at its Texas greenhouse operations.”
Two factors bolster Village Farms’ long-term strategies. First, a majority of Americans support marijuana legalization. Second, the Democrats need job-building opportunities and the botanical sector is a natural place to look. That bodes well for marijuana stocks, even the less-than-direct ones like VFF.
Note: This article originally appeared at InvestorPlace.
On the date of publication, Josh Enomoto held a long position in YCBD.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.