3 Cannabis Stocks Might Have What It Takes to Join the Ranks of the S&P 500 Index

The S&P 500 (SNPINDEX: ^GSPC), with its broad base and weighted market caps, is the best measurement of the U.S. economy and stock market. This 500-stock index may not have the rich history of the Dow Jones Industrial Average (INDEXDJX: ^DJI), which recently commemorated 122 years, but its industries and sectors are substantially more representative than the Dow. 

What are the criteria for a cannabis stock to be included in the S&P 500?

Companies who meet the following five criteria are chosen by a committee for inclusion:

1. The company’s market cap must equal or exceed $6.1 billion.
2. The company’s annual dollar value traded to free-float capitalization exceeds 1.
3. The volume of shares traded each month, for six consecutive months prior to committee evaluation, is no less than 250,000.
4. The company must be publicly listed on either the Nasdaq or the New York Stock Exchange.
5. The company’s stock must be representative of U.S. industries.

To date, no cannabis stocks have satisfied this criteria for S&P 500 inclusion, nor have any met the requirement for market cap; however, should the advancement continue toward marijuana legalization in North America, with a steady increase in valuations, three cannabis stocks may be future candidates for the prestigious S&P 500.

Among pure-play cannabis stocks, Canopy Growth is the only one that may satisfy inclusion criteria for S&P 500 any time in the near future. As of last week, Canopy Growth uplisted to the New York Stock Exchange, becoming the second marijuana stock to make the leap from over-the-counter exchanges to listing shares on one of the more prestigious exchanges.

With a market cap nearing the $6 billion requirement and a daily trading volume holding steady, Canopy Growth has as much potential as any marijuana stock of qualifying for S&P 500 inclusion. That minimum for market cap still hasn’t been reached, however, and the company needs to accrue more time on the requisite NYSE or Nasdaq exchanges for consideration. Come mid-2019, though, those requirements could be met.

Marijuana stock Canopy Growth Corp. (NYSE: CGC) is the most likely candidate for inclusion in the S&P 500. 

As Canada is poised for the legalization of recreational cannabis in July, becoming the first among developed countries to accomplish this, the country’s potential market will expand tremendously. Canada anticipates no less than an additional $5 billion in annual sales with the opening of its recreational market, and Canopy Growth is in a prime position to claim a significant portion of those sales.

The company’s licensed growing capacity is already at 2.4 million square feet and growing; shortly, it may encompass around 5.7 million square feet. This growing capacity should ensure its annual production goals of 500,000 kilograms are attainable. Pending Canada’s demand from the start of the recreational market is strong and the market can assuage concerns of a cannabis supply glut with foreign exports, Canopy Growth has a good shot at reaching or exceeding the $6.1 billion criteria for market cap.

Among cannabis stocks to invest in, Scotts Miracle-Gro (NYSE: SMG) has a reasonable chance of inclusion in the S&P 500.

Scotts Miracle-Gro may not be a pure-play cannabis stock, but the company’s chances of inclusion in the S&P 500 sometime next year are reasonable, nonetheless. Scotts connection to the marijuana industry comes through Hawthorne Gardening, its subsidiary that supplies hydroponics to the MMJ industry. Hawthorne Gardening’s hydroponics utilize a growing method for cannabis plants that involves a water solvent rich in nutrients, as opposed to a soil, and the company also provides lighting solutions, nutrients, and soil to growers servicing the MMJ industry. Among Scotts Miracle-Gro’s sales in 2017, Hawthorne’s comprised 11% of the total. The subsidiary also succeeded in tripling its net income relative to the prior-year period.

The thing that sets Scotts apart and adds to its desirability as an investment stock is its exposure to the booming industry, yet with a lower degree of risk compared to investing in pure-play cannabis stocks.

Two aspects of Scotts’ business work in its favor toward inclusion on the S&P 500. The first is that the company’s average volume of daily transactions exceeds 600,000 shares. And second, Scotts has a long track record of listing on one of the required exchanges. What is not yet in the company’s favor is its market cap, which is currently $4.7 billion. Back in January, the company’s market cap nearly reached $6 billion; unfortunately, licensing delays for retailers in California hit Scott’s hard, with Hawthorne Gardening sales slowing shortly after.

Scotts Miracle-Gro offers a comfort to investors in its diversity of operations, with nearly 90% of its sales generated from lawn and garden offerings. These more traditional operations tend to exhibit a growth rate in the low to mid-single-digit percentages. Should the U.S. cannabis industry encounter significant setbacks, Scotts’ operations ought to remain steady for the long-haul.

Perhaps because it is not a marijuana stock, and it is far less reliant on the marijuana industry, Cree (NASDAQ: CREE), shows promise of eventual inclusion in the S&P 500.

As a manufacturer of lighting systems and LED bulbs, Cree is similar to Scotts Miracle-Gro in its lessor reliance on the marijuana industry. Even less than so than Scotts, in fact, because Cree doesn’t distinguish a percentage of sales from the marijuana industry from the rest of its business. The lighting manufacturer has been emerging, however, with a revenue stream that shows promise for the coming years.

When it comes to possible inclusion in the S&P 500, Cree’s strength as a candidate comes from a long-standing listing on a prestigious exchange and strong liquidity. Cree trades around 1.4 million shares per day. Where the company needs work is in raising its market cap, which is currently at $4.5 billion. In order to raise that market cap to the requisite $6.1 billion minimum for inclusion in the index, the company needs to persuade cannabis growers of the future of LEDs and lighting systems.

High-pressure sodium (HPS) lights are currently the most utilized by growers for crop cultivation. Though HPS lights do produce yields that are predictable, they also generate significant heat, requiring frequent replacement. Between the electricity drawn from the HPS lights and the costs involved in climate-control of a temperate growing space, electric bills can be steep.

The LEDs Cree offers, however, have a significantly longer lifespan compared with the HPS bulbs, with the added benefit of using far less electricity while generating less heat. The drawback of LEDs is that their up-front cost is still far higher than HPS bulbs, all the while, often yielding less consistent results. Therefore, once Cree is able to demonstrate an LED product with yields that mirror HPS bulbs, and with a drastically reduced cost of electricity, growers are likely to jump on board. And Cree, in the process, could become one of the next sought-after ancillary cannabis stocks.

(For more on ancillary pot stocks, read This Could Be the Next Big Hit for Marijuana Stocks)