Is It Time to Invest in Marijuana Stocks?

It's a hot-button political topic and an $8.5 billion business in the U.S. So, this week, we're take a deep dive on the investment potential of legalized marijuana. ------------------------------------------------------------------------------------------------------------------------------------------------------ [View this email in your browser]( It's a hot-button political topic and an $8.5 billion business in the U.S. So, this week, we're take a deep dive on the investment potential of legalized marijuana. We're also examining stocks with robust competitive advantages and helping you understand the estate tax. – Katie Carrera, Stock Up Editor TWEET OF THE WEEK --------------------------------------------------------------- [The secret formula...ssshhhhh: 1) Live below your means. 2) Keep debt low. 3> Save early, heavily, and regularly.]( [See all our Tweets!]( Is It Time to Invest in Marijuana Stocks? --------------------------------------------------------------- There are more than a dozen international markets that have legalized medical cannabis. In the United States, where cannabis is illegal at the federal level, 30 states have laws in place that broadly allow the use of medical marijuana while nine plus the District of Columbia have legalized recreational marijuana. Amid a rapidly changing landscape that seemingly points toward numerous growth opportunities, [should you invest in cannabis stocks]( We asked two of our contributors who cover the marijuana industry to offer analysis both for and against jumping into this trending market. Is this a viable business? [Keith Speights]( The short answer is "absolutely." The longer answer is that the viability of the marijuana business changes based on the country in question. The marijuana industry is definitely viable in Canada and Germany, two developed countries that have legalized cannabis at the national level. There are marijuana growers operating quite profitably in these markets, notably including one of the larger players, Aphria ([NASDAQOTH: APHQF](. As for the market investors probably care about the most — the U.S. — the answer is still "yes." There are certainly serious constraints for the U.S. marijuana industry, particularly with onerous federal regulations about how banks can interact with marijuana businesses. However, there's also a lot of money being made. Last year, $8.5 billion was spent on legal cannabis in the U.S., according to ArcView Market Research and BDS Analytics. That's more than Americans spent on ice cream in 2017. I think the question you have to ask about the continued viability of the marijuana industry in the U.S. is whether it's likely that the federal government will attempt to intervene in states that have legalized either medical or recreational marijuana. [Sean Williams]( In countries and states where marijuana is legal, the business model appears to be viable on paper. But cannabis remains an illicit drug in what would be the most lucrative market in the world, the United States, and it faces disadvantages that seemingly no other industry will have to contend with. For example, until Canada passed the Cannabis Act on June 19, practically all marijuana-based businesses had little or no access to basic banking services. It's not that banks had no desire to work with the burgeoning marijuana industry, it's that banks feared criminal and/or financial repercussions if they offered a line of credit, or even a checking account, to a cannabis-based business. In the U.S., a powerful Senate committee recently blocked a proposal that would have allowed banks to do business with marijuana companies that are complying with state laws.The lack of access to traditional sources of capital could have a long-term adverse impact on marijuana stocks. Then there are the tax concerns. Despite categorizing marijuana as an illicit drug, the federal government has no qualms about taxing the income of cannabis businesses operating in states where it has been legalized. Tax law also prohibits businesses that sell federally illicit substances from taking corporate income tax deductions — that can result in an effective corporate income tax rate as high as 90%! What does the market look like? Speights: In Canada, there are a handful of larger marijuana growers with significant production capacity: Canopy Growth ([NYSE: CGC]( Aurora Cannabis ([NASDAQOTH: ACBFF]( and Aphria rank at the top. There are also dozens of smaller marijuana growers in Canada, several of which are listed on the Toronto Stock Exchange, and I believe we will see more consolidation in Canada over time. In the U.S., most marijuana businesses remain privately owned. Suppliers are part of this ecosystem, too. Kush Bottles, for example, focuses on selling packaging supplies to cannabis dispensaries and growers in the U.S. Scotts Miracle-Gro ([NYSE: SMG]( has been gobbling up smaller hydroponics companies and now stands as the go-to supplier for marijuana growers. There has also been interest from larger companies that previously haven't been involved in the marijuana industry. Last year, Constellation Brands, a large alcoholic beverage maker, bought a 9.9% stake in Canopy Growth. Molson Coors Brewing is [reportedly in talks with several other Canadian marijuana growers]( about an investment and partnership deal. It's possible other alcoholic beverage companies could join the fray, and big tobacco companies may potentially move into the market as well. Williams: Though the top eight growers in Canada are on track to produce [in the neighborhood of 1.8 million kilograms of cannabis by 2020 or 2021, the rest of the worldwide cannabis]( industry is fragmented, and largely consists of small or privately owned operations. Consolidation would help lower long-term costs, but it's not guaranteed to happen -- even in Canada, where growers have spent much of their capital expanding their production capacity and might not have much left over for acquisition purposes. International markets are also expected to play a critical role by gobbling up any oversupply from the domestic Canadian market. Given that no industrialized country has ever legalized adult-use marijuana before, no one, including myself or Keith, knows for sure what to expect from a supply-and-demand perspective. That's worrisome, especially when Canadian growers are counting on foreign markets to purchase well in excess of 1 million kilograms of cannabis by 2020 and beyond. Should I invest in marijuana stocks? Speights: My optimism remains intact, but my response is a very cautious "yes" — and only for investors willing to take on a considerable level of risk. I don't use the word "investors" lightly; you shouldn't buy a marijuana stock to try to make a quick buck. You should thoroughly check out the business fundamentals, the growth opportunities, and the risks just like you would any other stock. Personally, I've been generally bullish on the largest Canadian marijuana growers. I think Canopy Growth, Aurora Cannabis, and Aphria are in the best position to capitalize on the recreational market in Canada and in the global medical marijuana market. Keep in mind that the marijuana industry involves more than just marijuana growers. In my opinion, Scotts Miracle-Gro is one of the best ways to invest in the expansion of the industry. Its cannabis-focused subsidiary, Hawthorne Gardening, made $287 million last year, and that's before acquiring the top hydroponics products supplier in the U.S. Marijuana sales in the U.S. are projected to reach at least $22 billion by 2022 — jumping more than 150% in just four years. I think Scotts Miracle-Gro could benefit tremendously from this growth. But all of the stocks that I've mentioned have a lot of growth baked into their share prices, making them riskier than they'd otherwise be. That's especially the case for the Canadian marijuana growers. Even though I have been positive overall about these stocks, their fortunes beyond 2020 depend on how quickly international marijuana markets expand. Williams: Probably not. One of the [grim realities]( marijuana stocks could face in Canada is that many might not be nearly as profitable as expected. Wall Street earnings-per-share estimates for fiscal 2019 have fallen across the board, in part due to the expectation that dried cannabis will be commoditized over time. In Colorado, Washington, and Oregon, the per-gram price for dried cannabis plummeted not long after legalization, leading me to believe that this will likely be the case in Canada once a backlog of licensing applications and sales permits is processed. Don't overlook the lengthy impact [share dilution]( will have on this industry, either. Access to financing has been extremely limited, causing Canadian growers to turn to bought-deal offerings. This involves the sale of common stock, convertible debentures, stock options, and/or warrants — that can be exercised for months or years to come — to an investor or group of investors prior to the release of a prospectus. Though it's been a great way to raise capital, it's also ballooned the outstanding share counts of publicly traded pot stocks. Ultimately, this industry has a lot of maturing to do, and I would suggest investors keep to the sidelines until we have more clarity on supply, demand, and overall profitability. --------------------------------------------------------------- States cash in: The legalization of medical and/or recreational marijuana has presented a revenue generating opportunity for states. Take Colorado: It legalized recreational marijuana in 2014 and generated $67.6 million in taxes, licenses and fees that first year. Last year, it made $247 million from cannabis sales. --------------------------------------------------------------- 3 Stocks With Impenetrable Competitive Moats Investors can give themselves a better chance of prospering by seeking out businesses that can maintain its competitive advantage(s) — or competitive moat — over its peers over long periods of time. Those advantages, which should allow them to generate profits during both bull and bear markets, exist in every industry and sector but companies that can hold on to them for years and decades can be rare. [Here are three companies]( that have managed to do just that: - Intuitive Surgical ([NASDAQ:ISRG]( The robotic-assisted surgical system developer has a robust installed base of machines — as of March 31, there were 4,528 da Vinci surgical systems in hospitals and universities around the world and has spent countless hours training medical professionals how to operate them. That kind of rapport is priceless and helps lock customers into using the system, or new models of it, for a long time to come. It also boasts high operating margins from the sale of instruments used with each procedure, and servicing its machines. Both categories should grow as the company's number of installed machines increases. - Sirius XM Holdings ([NASDAQ:SIRI]( While it faces pressure from online and terrestrial radio, the satellite-radio operator's has a key advantage in that it has no direct competition. Sirius XM generates nearly all of its revenue from a subscription-based model, which isn't as susceptible to recessions as advertisements. (Ads make up only 3% of the company's revenue.) It also benefits from a mostly fixed-cost model. While it spends to hire on-air talent, its general system expenses are consistent over time, suggesting that as its subscriber base expands its margins should improve. - Amazon.com ([NASDAQ:AMZN]( Though the retail sector is rife with competition, the moat that the e-commerce and Web-service giant has built is exceedingly difficult, maybe even impossible, to overcome. Its intricate distribution system and reasonably low overhead have allowed Amazon to become the go-to source for online purchases, and as such it has established an ability to undercut the pricing of many, if not all, traditional retailers. Then there's Amazon Web Services, a dominant force in providing cloud services for businesses that generated more than 70% of the company's operating income in the first quarter, and should allow margins to expand. With its robust cash flow — Wall Street projects a compound annual growth rate in cash flow per share of 37% through 2021 — Amazon will also have more funds than ever to throw at new projects. --------------------------------------------------------------- Friday the 13th: Given the day, here are some facts about the American horror franchise: The original movie made its debut on May 9, 1980 and there have been 11 slasher sequels since. Combined, those 12 movies have raked in more than $380 million at the box office (that's more than $846 million when adjusted for inflation) --------------------------------------------------------------- SPONSORED [This stock could be like buying Berkshire in 1992]( This Stock Could Be Like Buying Berkshire in 1992 You probably already know Berkshire Hathaway has racked up amazing, life-changing returns over its 50-year history. But you might not know that we've found a much smaller company, 1/30th Berkshire's size, that's closely imitating Berkshire's performance. [Learn More]( --------------------------------------------------------------- 5 Facts You Might Not Know About the Estate Tax Estate taxes have been a major political issue for some time but isn't necessarily well understood. With that in mind, [here's a rundown of who the estate tax applies to]( and other useful details to know. 1. The estate tax only applies to very rich families: Under the Tax Cuts and Jobs Act, the estate tax basic exclusion amount increased to $11,180,000 per person, meaning Americans can exclude this amount of assets from their taxable estate. Married couples can exclude this amount for each spouse. 2. There are completely legal ways to exempt your assets from the estate tax: Among the options are the annual exclusion for gifts, which allows you to give as much as $15,000 per person to as many people as you'd like, and trusts such as a grantor retained annuity trust or GRAT. 3. The estate tax rate is 40%, but most families' effective estate tax rate is much less: This is largely due to the exclusions and allowances that can reduce estate sizes. Here's an example: Let's say that a wealthy couple who died in 2018 had an estate worth $50,000,000. Over the past 10 years, they had given the maximum allowable annual gift amount to each of their four children and their spouses, as well as to their 10 grandchildren — for a total of $4,860,000 — reducing their estate to $45,140,000. Between the two spouses, they have a lifetime exclusion of $22,360,000, so their taxable estate will be $22,780,000. Based on a 40% rate, this couple's estate would be taxed $9,112,000, which translates to 18.2% of the original $50 million estate. 4. Unrealized capital gains are a big part of the estate tax: The Federal Reserve has said that 55% of the taxes collected on estates worth more than $100 million come from unrealized capital gains — more than from any other type of asset combined. 5. Many states have their own estate tax: There are 12 states plus the District of Columbia that have some form of an estate tax, and most don't use the same threshold as the IRS. --------------------------------------------------------------- Do the (side) hustle: An estimated 37% of American adults have a side hustle and they're earning an average of $686 per month, according to a [Bankrate study](. That's not a small chunk of change! --------------------------------------------------------------- Meet The Ascent: A New Brand from The Motley Fool The road to wealth is paved with hundreds of small but important personal finance decisions. Many are simple, like spending less than you earn. Others can be more intimidating to solve for. Should you take a 15-year or 30-year mortgage? Use a credit card with cash back or miles? Work with a discount or full-service broker? It can be exhausting to balance all of the variables, and who really wants to work with long division to figure out which savings account is best? Fortunately for you — we do! And we've got your back. We are excited to bring our financial expertise and unbiased analysis to the world of personal finance with [The Ascent]( where we will review hundreds of financial products ranging from credit cards and savings accounts to mortgages, discount brokers, insurance, and more to help you make the most informed decision possible. Get started on your path to financial freedom by visiting our rankings of [2018's best credit cards]( and more at [The Ascent](. --------------------------------------------------------------- Kids these days: Only 35% of 16- to 19-year-olds worked a summer job last year, according to the [Pew Research Center](. That's a pretty dramatic drop from 2000 when 51.7% of teens had summer jobs. Researchers offered multiple explanations including, fewer low-skill, entry-level jobs, more year-round school enrollment, and an increase in unpaid internships. --------------------------------------------------------------- FEATURED PODCAST --------------------------------------------------------------- [Motley Industry Focus]( Want to Invest in Smart Speakers? Say Hello to Sonos With its IPO expected to price later this summer, Sonos will be the rare, pure-play option for investors eyeing the fast-growing smart speaker market. Can this $1 billion business go head to head with some of the world's largest companies? [Subscribe on iTunes]( Join the 1,300,000+ people who follow us! [Twitter]( [Facebook]( We work fervently, feverishly, and Foolishly to make sure all the facts and figures we publish in our emails are 100% accurate and up to date. Returns as of July 11, 2018. 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