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Legal Cannabis Faces Competition from Black Market: 3 Stocks That Can Lead the Brigade

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The recent legalization of marijuana in several states in the US has had many people eager to invest in the emerging sector. The fast-growing industry has led to several legal dispensaries sprouting up throughout the states in which they are sanctioned in. Many people assumed with the legalization of cannabis that the illegal distribution of the drug would disintegrate but that has not been the case. As the legal marijuana business has grown substantially in recent years, so has the unlicensed dispensaries. In California, early projections estimated that cannabis tax receipts would reach $1 billion for 2018 but fell short with only $345 million collected last year.

The black-market dispensaries are cited as a major reason estimates fell short for the industry. Cameron Wald, executive vice president of Project Cannabis, stated that illegal dispensaries can sell the same product for 40% less than licensed dispensaries. The unlicensed dispensaries don’t pay taxes or permit fees to the cities they operate in, which allows them to undercut their legal competitors.

Cannabis industry attorney David Welch believes penalties enforced on the illegal businesses are too low to dissuade their operators to shut down because the profits they see outweigh the sanctions. Penalties are usually listed as misdemeanors, which usually just ends up being a fine that incentivizes the owners to reopen the store. The Los Angeles Police Department estimates there to be around 259 illegal dispensaries operating within the city while there are only 186 licensed dispensaries.

Untapped Market Share

Many people see the continued legalization of marijuana as an opportunity to become a part of the next booming industry. The reality of the situation is that the legalization of the drug has failed to successfully eliminate the illegal distribution of it. While the industry is currently struggling to meet its potential, the underlying opportunity remains.

According to New Frontier Data, there is an estimated $70 billion in illegal sales nationally, which is 7X the size of the legal market. The current legal cannabis industry is only capturing a fraction of the market. If states like California can solve the black-market problem by either issuing harsher sanctions on illegal dispensaries or lowering taxes so legal dispensaries can compete, then it would bode well for the cannabis industry.

Stocks That Can Catapult the Industry

With all of this in mind, some companies still have the potential to capture a much larger share of the cannabis market, catapulting them into one of hottest industries everyone wants to be part of. Let’s take a look at three companies that can help the legal cannabis industry take the next step.

Innovative Industrial Properties (IIPR - Free Report) is a red-hot REIT that is planning to buy buildings and lease them to growers of medicinal marijuana. The real estate investment trust is focused on the acquisition and management of industrial properties that are leased to experienced state-licensed operators for medical-use cannabis facilities. IIPR is currently listed as a Zacks Rank #2 (Buy) and has had an unbelievable year so far. The stock has skyrocketed 176.1% year-to-date, and is looking to carry on the momentum into the second half of the year. The REIT increased its earnings by 42.11% and its revenue by 42.65% compared to the previous quarter. IIPR has been able to surge to new heights this year and investors looking to get into the cannabis craze should strongly consider them.

The Scotts Miracle-Gro (SMG - Free Report) is diving into marijuana production by investing in businesses that sell fertilizers, soil, and other accessories to pot growers. The company also invested in hydroponics, a method of growing that allows producers to grow cannabis indoors. Scots Miracle-Gro is currently sitting at a Zacks Rank #1 (Strong Buy), and has also had a tremendous year. The stock is up 62.4% on the year, leaving the broader fertilizers market in the rear-view mirror. Consensus Estimates are calling for a bottom-line leap of 18.67% with a top line jump of 4.39% next quarter. Looking ahead to the company’s full year outlook, estimates are projecting earnings to increase 16.71% with revenue spiking 12.89% to $3.01 billion. SMG is subsidizing the production of legal marijuana, and its strong first half performance paired with its second half outlook can attract investors looking to be a part of the emerging market.

GW Pharmaceuticals (GWPH - Free Report) focuses on discovering and developing cannabis-based prescription medicines. The company’s lead product, Sativex, is used for the treatment of MS symptoms, chemotherapy pains, and neuropathic pain. GW Pharmaceuticals is currently listed as a Zacks Rank #2 (Buy) and has provided substantial returns for its shareholders this year. The pharmaceutical company has seen a surge of 76.7% year-to-date and holds the potential to continue this growth.

The company currently isn’t profitable, but our Consensus Estimates are projecting substantial year-over-year growth. Our estimates are forecasting the company’s earnings to increase 89.68% to go along with a revenue surge of 1,731.50% for the current quarter. In addition, revenue is projected to hit $218.50 million this year, which would be a year-over-year increase of 1,188.60%. GWPH is a stock expected to grow substantially in the near future, making it a sound pick for investors looking to include the budding marijuana market in their portfolio.

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