This Could Be the Next Big Hit for Marijuana Stocks

One look at cannabis stocks over the course of these past two years reflects an industry in the throes of tremendous growth. A large number of marijuana stocks have been up 1,000% or more since the start of 2016. Rapid sales figures increase and the public’s shift toward a more tolerant opinion of marijuana drove this unprecedented growth.

Investors will have noticed, however, the marijuana stocks index lately reflects a less bountiful picture, with marijuana stocks in decline. 

From January 23 to April 9 this year, the North American Marijuana Index (which represents dozens of North American cannabis companies) has dipped 39% in value from its peak to its lowest point.

The explanation behind this lowering of marijuana stocks could be traced to a confluence of variables. For starters, there has been a slight delay in Canada’s expected implementation of a legal recreational market. This, coupled with growing concern for a cannabis supply glut and the ongoing issue of dilution of shares, could explain a lot. Another possible factor: investors may be partially moving away from marijuana stocks working directly with the cannabis plant while favoring stocks focused on what is known as the ancillary cannabis industry.

Ancillary marijuana companies may be the up-and-coming marijuana stocks to invest in.

This ancillary industry is comprised of companies working behind-the-scenes to support the marijuana industry without ever coming into direct contact with the plant. These companies may end up surprising investors and Wall Street in the coming years since their work has largely gone unnoticed during the boom of the legal cannabis industry these past several years. All of this, of course, is pending Canada passing its legislation to legalize recreational marijuana and the medical and recreational marijuana industries continuing to expand internationally.

Assuming the marijuana industry continues its expansion domestically and abroad, there are two ancillary industries worth watching, with the potential to feature the emerging (ancillary) marijuana stocks to buy now. 

1. Marijuana product packaging and marketing

Opportunities for investors might be the most profitable within the marijuana industry’s supply chain; these companies, specifically, would be the ones responsible for meeting the rigorous requirements for packaging, marketing and branding of marijuana products. A prime example is Health Canada’s recent announcement of the packaging guidelines for recreational cannabis products. The guidelines mandate packaging must be tamper-evident as well as child-resistant, featuring a bright yellow health warning label. The implication of these guidelines is growers will have more difficulty featuring their brands or logos on packaging.

This is where an ancillary cannabis company, such as California-based Kush Bottles (NASDAQOTH:KSHB), steps in. The design and manufacturing of child-resistant packages and pop-top bottles for both the recreational and medical marijuana industries is Kush Bottles’ specialty. The company also offers vaporizers and branding solutions. Kush Bottles serves a growing clientele of more than 5,000 recreational and medical dispensaries operating legally worldwide. The company has essentially made its services indispensable, securing a spot for itself as the industry’s go-to company for cannabis support services. 

The latest quarter’s financial report showed Kush Bottles’ sales increasing 249% year-over-year, totaling $10.36 million. On the downside, the company reported a loss of $920,000 – a departure from the small profit it had turned in the same quarter the previous year. However, it remains one of the ancillary cannabis industry’s most visible players.

2. Regulation and enforcement of cannabis laws

One other intriguing opportunity for investment involves companies regulating and enforcing marijuana laws. Among the items considered a hot commodity for enforcement in the coming years is the cannabis breathalyzer.

While U.S. laws clearly delineate what being under the influence of alcohol entails for drivers (a hard line of 0.08% blood alcohol content), the guidelines for cannabis are less clear. In fact, no preset guidelines exist for what cannabis impairment entails. Further complicating the matter, the psychoactive component of marijuana responsible for giving users a high (THC), may be detectable for days or weeks in a person’s system after use. Therefore, a driver can test positive for marijuana impairment even if weeks have passed since the driver used the drug.

Hence, why marijuana breathalyzers enter the picture.

So far, a collection of prototypes are in the process of development, with the goal of providing law enforcement with the tools necessary to ensure safety on the roads. The devices are portable and will ideally allow the enforcement officer to accurately determine if a driver has recently used marijuana. Additionally, the devices will serve the dual function of ascertaining both blood alcohol and THC blood content, becoming an all-in-one alcohol and weed kit. The technology for these devices is still evolving and must pass additional testing phases, but, investors may want to keep a close watch on the companies spearheading these technologies.

Investors looking for marijuana stocks to invest in need to be aware of two drawbacks accompanying investing in the ancillary business.

First of all, the success of the ancillary cannabis industry is part of an interdependent chain where each one’s success is conditional on certain factors. Specifically, ancillary businesses are wholly dependent on the plant-based marijuana industry’s success which is wholly dependent on a rising demand and more countries legalizing marijuana. If the cannabis industry cannot continue to grow and thrive, neither can the ancillary industry. The best predictor of the need for ancillary businesses and the ancillary industry’s growth, then, is to keep a close watch on expected legalization and legal cannabis sales.

Finally, investors should remember most of the ancillary businesses are relatively new and still figuring things out; therefore, hiccups are expected. The exception would be banks, which have diversified operations, but, niche businesses (e.g., manufacturers of the marijuana breathalyzer) do not have this advantage. Breathalyzer manufacturers may not have an approved product ready for mass production for several years. Therefore, should the ancillary cannabis industry be the next boom, investors may need to adjust short-term expectations.

(For more intriguing developments in the marijuana industry, read Marijuana Stocks Get Crafty: Here’s What Investors Want to Know About Beer and Cannabis Stocks.)