In case you haven't noticed, the marijuana industry is really turning heads -- and with good reason. In 25 days, our neighbor to the north will be legalizing adult-use marijuana. The passage of the Cannabis Act in June puts Canada on track to become the first industrialized country to OK the sale of recreational marijuana, and in the process generate billions of dollars in added annual revenue.
Early stage ancillary pot businesses could offer an extraordinary (albeit risky) investment opportunity
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As you can imagine, legalizing recreational marijuana is expected to generate big profits for companies that are directly involved in the cannabis supply chain. Growers, processors, distributors, and retailers are expected to see a huge uptick in demand and sales in the weeks and months to come.
But what you might be overlooking is the burgeoning world of ancillary businesses working behind the scenes to make the cannabis industry tick. Some of these companies have become well known, such as California-based KushCo Holdings (NASDAQOTH: KSHB). KushCo is predominantly focused on packaging and marketing solutions for its more than 5,000 global customers. With tight restrictions on packaging quality and branding in Canada, KushCo will work with growers to find solutions that meet regulatory specifications, as well as emphasize their unique brand so that it stands out.
Scotts Miracle-Gro is an example of a less-than-pure-play ancillary business that's counting on growth in the pot industry to drive its own results. Although Scotts generates most of its revenue from its traditional lawn and garden operations, 11% of its sales last year were derived from its Hawthorne Gardening subsidiary. Hawthorne provides hydroponic solutions -- growing plants in a nutrient-rich water solvent -- to the medical cannabis industry, as well as lighting, soil, and nutrient solutions.
Yet, there are other lesser-known ancillary movements going on behind the scenes that could prove very profitable once they've had time to develop and mature. Though there could be many bumps along the way, and it's not possible to tell which companies will come out as clear leaders, the following two ancillary investment opportunities are worth closely monitoring.
1. Marijuana breathalyzers
One of the more intriguing early stage ancillary pot ideas is the marijuana breathalyzer.
Within the U.S. and Canada, one of the biggest concerns of lawmakers who oppose legalization is what'll happen to cannabis users who drive. Scientific studies have shown that using marijuana can slow driver response reaction times, which means it's a drug that can impair.
However, it's a lot tougher to draw a line in the sand with cannabis use than it is for, say, alcohol use. Alcohol metabolizes through the body in less than a day, and a simple blood alcohol content (BAC) measurement provides a clear picture of your impairment level to peace officers. This isn't necessarily the case with cannabis consumption. There aren't these line-in-the-sand impairment measurements. And to make matters more complicated, tetrahydrocannabinol (THC), the psychoactive component of the cannabis plant that gets a person "high," can stay in the system for days or weeks, which can make it tough for peace officers to determine recency of use.
The solution is the marijuana breathalyzer, which is being developed by private company Hound Labs and publicly traded microcap Cannabix Technologies, among others. A working product that can determine recency of use and isolate/calculate THC content in a user's breath would almost certainly become a standard-issue product for police forces throughout North America, if not globally.
Now, before you get too excited, understand that this is still a work in progress. While we have seen positive lab developments -- and we may see in-field testing -- such a device looks to be at least a year out, if not longer. Nevertheless, it's an intriguing early stage concept that could reap significant rewards if successful.
2. Cannabis delivery services
The other behind-the-scenes industry that should have your undivided attention is cannabis delivery. Of course, you should understand that there's much more to delivering pot than simply someone calling a dispensary or texting in their order. What should really be of interest to investors are the analytics being employed by cannabis delivery services.
Though it remains a private company, California-based Eaze would probably be the most exciting initial public offering, next to Tilray, if it were to ever decide to go public. Eaze isn't your traditional delivery service. It utilizes data through its app to coordinate with local California dispensaries to get product to consumers within about 20 minutes' time. But it can also use the wealth of data it's able to gather through its app -- most pot sales are conducted in cash at physical stores, making it difficult for businesses to analyze customer purchasing trends -- to improve its own operations and importance to local dispensaries. Not surprisingly, rapper Snoop Dogg's venture fund, Casa Verde Capital, is one of Eaze's investors.
Understandably, though, delivery is still relatively new to the cannabis space. While convenient for the consumer (especially elderly users), there are still kinks that need to be worked out. For instance, companies need to properly ensure that consumers are age 21 or older, which isn't guaranteed when nothing more than a photo of an ID sent by text is used to verify identity for some delivery services. Note, Eaze uses a secure website, rather than a text, to allow users to upload their identification. Additionally, protecting cannabis while in transport could be a concern.
Still, there's a boatload of opportunity in cannabis delivery, and if Eaze ever goes public, this investor would probably give it a very serious look.
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