Top 5 States for Marijuana Stocks

By Todd Campbell Markets Fool.com

Marijuana legalization is sparking interest in marijuana stocks, so if you're interested in how to profit from cannabis, you're not alone. There are likely to be more losing marijuana stocks than winning marijuana stocks, but the opportunity to profit from growing marijuana sales is undeniably interesting.

Continue Reading Below

Over the next five years, the U.S. marijuana market could be worth tens of billions of dollars, and according to GreenWave Advisors, LLC, these five states could move the needle most for marijuana companies. Read on to learn just how big the marijuana market may be in California, Washington, Pennsylvania, Colorado, and Michigan in 2021.

IMAGE SOURCE: GETTY IMAGES.

Marijuana's march to legalization

California became the first state to approve medical marijuana in 1996, and today, there are 28 states that have legalized medical marijuana. Last November alone, Arkansas, Florida, and North Dakota passed medical cannabis ballot initiatives.

The recreational-marijuana movement hasn't won as much support (yet), but following approval in Colorado and Washington in 2012, Alaska, Oregon, California, Maine, Massachusetts, and Nevada have followed suit.

Continue Reading Below

That could be just the tip of the iceberg. Polls show that support for pro-pot laws is growing, and that suggests people in even more states will vote on marijuana laws in the future. According to Gallup, Americans have never been more in favor of legalizing marijuana than they are now, and approval rates for medical marijuana are even higher: In 2015, a CBS News poll found that 84% of Americans want to see medical marijuana become legal nationwide. Buoyed by widespread support, marijuana advocates are already preparing to make their case for passing recreational-marijuana laws in Oklahoma, Missouri, and Texas.

It's anyone's guess if those efforts will be successful, but one thing is clear, and that's that states passing pro-pot laws are bringing in significant revenue from marijuana taxes. For instance, Colorado's marijuana sales exceeded $1 billion last year, and that resulted in $200 million in tax revenue that was used to support education.

Big-time projections

Colorado's success is impressive, but in a few years, thinks GreenWave Advisors' Matt Karnes, Colorado will only rank as the nation's fourth-largest market. The following chart shows the five states that Karnes believes will be the biggest marijuana markets in 2021, with California topping the list:

Data source: GreenWave Advisors, LLC. Chart by author.

It makes sense that California ranks highest because it's home to the country's biggest state population, and it just legalized recreational marijuana. The state's medical-marijuana market is the nation's oldest, and as a result, the infrastructure is already in place for the recreational market to hit the ground running. California's Emerald Triangle is the biggest marijuana-producing region in the country, and roughly 1,000 medical-marijuana dispensaries are already open for business statewide. In 2015, the Arcview Group estimates, California's medical-marijuana sales of $2.7 billion were 62% of medical-marijuana sales in the U.S. Karnes of GreenWave thinks that leveraging existing production and dispensaries could lead to $7.7 billion in marijuana sales in California in 2021.

Washington's marijuana market will be much smaller than that, but its marijuana market is growing quickly, and that could make it the second-biggest market in five years. In January, Washington reported that sales of marijuana products, including edibles, extracts, and marijuana for inhalation, totaled $139 million, up from $81 million in February 2016. At that rate, Washington should have no trouble reaching Karnes' $1.9 billion sales forecast in 2021.

Although it's a relative newcomer to marijuana legalization, Pennsylvania could also become a major market soon. Medical marijuana got a green light in the state last year, and it could be one of the next states to consider recreational marijuana. According to reports, 900 applicants are competing for the initial 27 dispensary and 12 grower-processor medical-marijuana permits in Pennsylvania. If that's any indication, then recreational-marijuana laws could pass, putting this market on its way to $1.8 billion in sales in 2021.

Colorado and Michigan could also be top states for marijuana companies to target. Karnes expects Colorado's market to reach $1.7 billion in 2021, and if Michigan passes recreational marijuana, then its market could total $1.3 billion in 2021. In 2008, 63% of Michigan voters passed medical marijuana, and that market now serves more than 200,000 patients. While pro-pot advocates fell shy of getting recreational marijuana on Michigan's ballot last year, marijuana advocates are already working on getting recreational marijuana on the ballot in 2018.

Top marijuana stocks to buy

Sales in these five states could propel the U.S. marijuana market to $30 billion in 2021, according to GreenWave Advisors, and if marijuana secures national approval, Cowen & Co. estimates sales could soar to $50 billion by 2026.

Obviously, there's a lot of money up for grabs. At first, most of that money is likely to go to small and mid-size private companies, rather than publicly traded companies. So far, most publicly traded marijuana stocks are trading via the unregulated over-the-counter market, or pink sheets. Listing on that market allows companies to avoid the strict listing requirements of major stock exchanges like the New York Stock Exchange, and as a result, investors in over-the-counter stocks run the very real risk of falling victim to fraud.

A better approach might be to focus on Canadian marijuana stocks like Canopy Growth (NASDAQOTH: TWMJF) and Aphria (NASDAQOTH: APHQF). Both companies generate millions of dollars per quarter in revenue, and each is a major player in Canada's national medical-marijuana market. If Canada follows through on plans to create a national market for recreational marijuana, these two companies could be winners.

Recently, Canopy Growth acquired competitor Mettrum to solidify its position as Canada's largest medical-marijuana company. Also, it raised 60 million Canadian dollars via a stock offering in December, to finance its expansion plans and conduct market research. Canopy Growth's Tweed is one of Canada's most popular brands, and a partnership with Snoop Dogg on Leafs by Snoop could offer intriguing expansion opportunities in recreational-marijuana markets.

Another way to play the marijuana market is to buy shares in drugmakers developing medicine derived from marijuana's unique chemical compounds, cannabinoids.

The biggest of these drugmakers is GW Pharmaceuticals (NASDAQ: GWPH), a $3 billion-market-cap company researching medicines based on cannabidiol (CBD), for epilepsy and other indications. Management reported results from three large scientifically controlled trials last year that show that its CBD drug, Epidiolex, can reduce monthly seizures in patients with rare forms of childhood epilepsy. GW Pharmaceuticals plans to file for approval of Epidiolex by the U.S. Food and Drug Administration this year, and if it's approved, then it could become available throughout the U.S. next year.

Another cannabis-drug maker to watch is Corbus Pharmaceuticals Holdings (NASDAQ: CRBP). Its research isn't as far along as GW Pharmaceuticals' is, but Corbus Pharmaceuticals is making progress. The company is evaluating an oral endocannabinoid-mimetic drug called Resunab that may help patients with systemic sclerosis (or scleroderma, a chronic autoimmune rheumatic disease) and cystic fibrosis. Recently, management reported mid-stage trial results in systemic sclerosis, and results in cystic fibrosis should be available soon.

While those marijuana stocks could be winners, they're all incredibly risky, and that means they aren't suitable for most investors. Instead, it may be best to focus on other profit-friendly investments that might not be as risky, at least until these companies get a bit more profit under their belts.

10 stocks we like better than Corbus Pharmaceuticals Holdings
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Corbus Pharmaceuticals Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

Todd Campbell has no position in any stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.