Our top 3 cannabis "pick and shovel" companies

When it comes to the cannabis industry, it's not only about the cultivators. In fact, there are many other sectors of the industry to watch.

When it comes to investing in the cannabis industry it can be difficult to know where to get started.

More and more people are interested in jumping on the booming cannabis green rush as the legal industry heats up, having delivered more than $10.9 billion in sales in 2018. In fact, Grand View Research predicts that the global market will increase in value to $66.3 billion by 2025, at a CAGR of 23.9%.

However, choosing which area of the market to invest in—such as production, cultivation, or retail—can be a difficult decision for neophyte investors to make. Although every area of the cannabis industry is currently in a state of rapid expansion, some areas of the market proved stronger than others, while certain pot stock have radically underperformed.

Additionally, many of the biggest players who deal with marijuana directly—as in growers and retailers—have been hit hard over the last year, due to ongoing supply issues in Canada, and a loss of business in the US to the still-thriving black market.

This volatility has caused many risk-averse investors to flee for the hills, despite the long term potential for investment once the industry finally matures. Thankfully, there are still a number of ways to play the cannabis game without directly interacting with the plant itself, such as the Ancillary Industry.

Often referred to as the "picks and shovels" of the cannabis industry, Ancillary companies offer crucial services to major cannabis producers such as packaging and branding solutions, soil yield optimisation, and real estate investment. 

While this may not sound as exciting as a Multi-State Operator (MSO) or pharmaceutical developer, these companies offer risk-averse investors a safer, less volatile way of getting in on the green rush, as they often remain insulated from fluctuation in cannabis market that can affect stock prices.

To make things easier for you, we've selected several pot stocks that we think have a significant shot at success.

So, here are three ways to play the Ancillary Market.   

Cannabis Ancillary

1. Hydroponic and Growing Solutions

For investors who are new to the Ancillary Market, the first port of call is often hydroponic growing technology developers.

One of the industry leaders in this space is GrowGeneration Corp (OTC:GRWG), which was founded in Colorado in 2014 and has since grown into the largest hydroponic supplier in the US.

The company has 23 organic centres across 9 states, which it uses to supply the cannabis industry with crucial soils, lighting technology, pest controls, ventilation and propagation supplies.

This was our 5th consecutive year of record growth for GrowGeneration, with revenues growing over 100% year over year. With our corporate foundation now in place, the company is well positioned to continue 100% year over year growth for several more years. GrowGen is now in 8 states, 21 locations, and services some of the country's largest commercial multi-state cultivation operators.

– Co-Founder and CEO of GrowGeneration Corp, Darren Lampert

The company performed strongly in 2018, picking up revenue of $29.0 million in 2018, which is an increase of 102% when compared to the previous year. GrowGen has also been recording substantial revenue this year, having generated $13.1 million during Q1 2019, with an adjusted EBITDA of $615,509.

Store operating costs and corporate overhead spending—defined as a percentage of revenue—also decreased substantially during this period, having declined to 15% and 10.5%, respectively.  

In July 2019 GrowGeneration also announced that it had completed an upsized, private placement totalling $12.8 million, before setting $100 Million in annual revenues as its next milestone.

The company's strategic institutional investors all participated in the offering, which included $4.0 million investment from lead investor Gotham Green Partners, $2.0 million from Merida Capital Partners and $1.3 million from Navy Capital.

According to the Co-Founder and Chief Executive Officer of GrowGeneration Corp, Darren Lampert, "the company now has over $16 million of cash on the balance sheet to execute on multiple acquisitions, with several planned to close in the 3rd and 4th quarters of 2019."

				
Disclaimer: Past performance is not an indicator of future performance.

"These acquisitions, when completed, are expected to propel our Company to over $100 million in annual sales."

"We are also pleased that our existing institutional investors, Gotham Green Partners, Merida Capital Partners and Navy Capital, are reinforcing their confidence in the Company with additional capital commitments. Lastly, we welcome JW and Jason Wild to our team of institutional strategic investors," Lampert said.

Hydroponics and growing solutions providers such as GrowGeneration allow investors to profit from the rapidly expanding demand for the cannabis plant worldwide while avoiding the risk of any one major pot stock failing.

As long as consumers have an appetite for marijuana, GrowGen will continue to enjoy robust growth. And luckily for investors, it doesn't seem like the cannabis market is going to be cooling down any time soon.

Cannabis ancillary

2. Packaging and Branding

One of the easiest ways to get in on the ancillary craze is to invest in a packaging and branding company, such as KushCo Holdings (OTC:KSHB).

These companies are a great way to gain a foothold in the cannabis industry, as they work with growers—in countries, states and provinces all over the world—to help them meet the complicated regulations and laws regarding packaging compliance. They also assist growers with branding and marketing duties, designing and producing eye-catching products that can stand out from their competitors in an increasingly cluttered cannabis market.

This makes KushCo a safe and reliable choice for investors who want to minimise their overall risk, as there will always be a demand for effective, reliable packaging solutions, particularly as many growers are ill-equipped to bring their products to market without third-party assistance.  

The company currently stocks over 1,500 SKU's with products that cover a variety of form factors including flower, pre-rolls and concentrates. And this is no small market, as research from Cowen estimates that the US cannabis industry could be worth over $80 billion by 2030.

Our customer base is gaining strength with the largest multi-state operators and Canadian LP's starting to scale in existing markets, while also preparing for growth in new emerging geographies – including recently approved Illinois.

– Chairman and CEO of KushCo Holdings, Nick Kovacevich

The same study also predicted that packaging and supplies could account for almost 6% of the market by this time. This means that KushCo could be looking at a potential addressable market of $4.8 billion by 2030.

The company has also been performing strongly in 2019, reporting a net revenue increase year-over-year of 221% to $41.5 million, while gross profit rose to 17.8%.

According to the Chairman and CEO of KushCo Holdings, Nick Kovacevich, the company remains "committed to investing in the expansion of the business through initiatives targeting high-demand, high-margin opportunities that will facilitate increased cross-selling throughout our robust customer base."

"Partnerships will help us achieve those revenue and margin goals, including our recently announced deal with CA Fortune, which opens an entirely new vertical that will facilitate access to a distribution network unlike anything ever experienced by the cannabis and hemp industries before.

"We expect demand to increase for the company's core product offerings as the cannabis and hemp markets continue to expand and mature," Kovacevich said.

				
Disclaimer: Past performance is not an indicator of future performance.

Additionally, the company recently closed on a $50 million credit facility with Monroe Capital LLC, which consists of a $35 million revolving line of credit and an accordion of up to $15 million, subject to compliance and borrowing base availability.

KushCo also sells vaporisers—which generates the majority of its current revenue—and supplies hydrocarbon gases and solvents, which are crucial for the production of cannabis concentrates and oils.

As a result, KushCo is well-positioned to profit from the rising popularity of vaporisers and new high-margin form factors, ensuring a predictable revenue stream for the foreseeable future.

cannabis ancillary

3. Real Estate Investment

If you're not crazy about investing directly with the plant itself, then you might want to think about looking at a cannabis real estate investment company, like Innovative Industrial Properties (NYSE:IIPR).

Similarly to other real estate investment trusts, Innovative Industrial Properties operates by acquiring land—and other assets—before leasing them out to cannabis companies for an extended period. This ensures that the company will always generate highly predictable cash flows, particularly because the average length of its remaining leases is 15.5 years.  

IIPR has also been expanding rapidly this year, having more than doubled the number of properties it owns, growing from 11 to 27 since the start of 2019.

The company generated rental revenue of approximately $8.3 million during Q2 2019, representing a 155% increase on the same period last year.

It is heartening to see the many significant steps that Illinois officials have taken to open the medical cannabis market for patients in need, and we are excited to support AWH in the enhancement of this facility to meet that demand.

– President and CEO of Innovative Industrial Properties, Paul Smithers

IIPR also completed an underwritten public offering of 1,495,000 shares of common stock during the quarter, resulting in gross proceeds of approximately $188.4 million.

IIPR's most recent investor update indicated that its investments are currently generating a yield of 14.5%, which means that it should be able to comfortably pay back its investments within five years' time.

Additionally, the company has entered into a partnership with Ascend Wellness Holdings (AWH), to help IIPR efficiently capitalize on further market growth.

 
				
Disclaimer: Past performance is not an indicator of future performance.

IIPR also recently offered an additional $8 million in funding to AWH, which will support the expansion of the company's regulated cannabis cultivation and processing facilities.

The President and CEO of Innovative Industrial Properties, Paul Smithers, said that the company is "excited to team up with AWH again as their long-term real estate partner in Michigan".

"AWH is very well-positioned, with a strong management team and balance sheet, as it ramps up its operations in Massachusetts, Illinois, Michigan and Ohio, each of which presents a tremendous market opportunity. We look forward to supporting their continued growth and success for many years to come," Smithers said.

Get a Taste for Green

Cannabis Ancillary

As you can see, the work of the Ancillary Market will be vital in ensuring the success of the cannabis industry.

And, although the global market for cannabis is expected to continue growing unabated, Ancillary stocks offer a way of investing that can avoid the massive price fluctuations associated with companies that deal directly with the plant.

So when you're looking into which companies to invest in, don't just focus on the cultivators and the retailers. Consider looking into the Ancillary Market as well, because sometimes the real action isn't out on the field, it's happening on the sidelines.  

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Hugo Gray
Hugo Gray

Hugo Gray is a Melbourne-based journalist with a body of work that covers a diverse range of topics, including immigration law, sex technology, and now the rapidly expanding cannabis industry.

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