Three stocks to grow profits from the legal cannabis sector

With five more US states legalising cannabis, professional investor Greg Taylor of the Medical Cannabis and Wellness UCITS ETF picks three stocks that should flourish.

While the US election may still be disputed at the presidential level, there is no doubt that the medical cannabis sector was a winner. Ballot initiatives to legalise medical and/or recreational cannabis were passed in five states. Most significantly, New Jersey legalised cannabis for recreational use (it already permits the drug for medical purposes); this is expected to create a domino effect in neighbouring states on the heavily populated eastern seaboard.

As the sector gathers momentum in the US, the stage is set for the rest of the world to follow it on the path of legalising medical cannabis. Share prices have reacted positively to these developments but there is still tremendous upside.

Supplying the greenhouse

Hydroponics retailer GrowGeneration’s (Nasdaq: GRWG) expansion is directly tied to the proliferation of the US cannabis trade. The group’s products range from lighting fixtures and seeds to humidifiers. All large operators turn to GRWG to service their cultivation operations. The company exceeded revenue expectations in the third quarter of 2020 and has continually raised its sales guidance throughout the year as growth has been propelled by several tailwinds.

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The industry is fragmented and GRWG has established itself as a reliable supplier for major operators across many regional markets in the US. We expect GRWG’s success to continue as the current environment of state-level cannabis legalisation supports long-term revenue growth trends.

Despite the challenges associated with Covid-19, Britain’s GW Pharmaceuticals (Nasdaq: GWPH) continues to enjoy increased adoption of its cannabis-derived drugs. Epidiolex meets a serious need in the field of epilepsy and the company expects strong growth for the treatment over the next few months.

The company has started advanced programmes for the treatment of multiple-sclerosis spasticity. It recently decided to accelerate several clinical-stage pipeline trials in this field. The current revenue base continues to grow thanks to the epilepsy treatment, but with its pace of research and development, GW Pharmaceuticals is well positioned to be a leader in several cannabis-derived drugs in the near future.

A saviour in the property sector

An interesting by-product of the current legal regime of cannabis in the US is the emergence of Real Estate Investment Trusts (Reits) as a source of financing in an industry hampered by regulations – the drug remains illegal at the federal level. With limited access to capital, the US cannabis industry has struggled to keep up with exponential demand; buying land and property for its production facilities has often proved problematic.

But it has found a saviour in the form of Industrial Innovative Properties (NYSE: IIPR). The group buys and then leases out properties to pot firms, helping them cut capital costs and make the most out of limited resources.

The current set of leases will be serviced at some of the highest rental rates for industrial properties in the country, reflecting the risk inherent in the tenants’ industry, but this also means investors are willing to ascribe a higher valuation to IIPR than to traditional Reits.

Greg Taylor is portfolio manager of the Medical Cannabis and Wellness UCITS ETF