The global marijuana market is growing at a fast pace and investors want to be a part of this growth story. A report by Grand View Research Inc. says that the global legal marijuana market size is expected to reach $84.0 billion by 2028, and is expected to expand at a CAGR (compounded annual growth rate) of 14.3% from 2021 to 2028. The report says, “Increased legalization of marijuana for medical and adult use and the growing adoption of these products for the treatment of chronic diseases are the key factors driving the market for legal marijuana.”

While this is good news for the industry as a whole, a major challenge for investors is hunting good stocks to invest in. There are companies like Aurora Cannabis that promised the moon three years back but have destroyed a lot of investor wealth in the subsequent years. Investors are on the lookout for stable companies in a new industry and that is a little tough. 

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One way to circumvent this challenge is to not look at companies that are directly related to marijuana, i.e. growers and retailers who have to touch the plant. Investors can look at companies that are essential to the success of marijuana companies but are not directly involved in the process themselves. Here are four such marijuana-ancillary companies:

Innovative Industrial Properties (IIPR)

IIPR (Innovative Industrial Properties) is one of the smartest plays in the marijuana sector. It has a simple operation: It buys real estate and then leases it out to marijuana companies. It is the first company on the NYSE that operates in the real estate space in the cannabis industry. As of March 11, 2021, IIP owned 68 properties located in 18 US  states, representing a total of approximately 5.9 million rentable square feet (including approximately 2.1 million rentable square feet under development/redevelopment), which were 100% leased with a weighted-average remaining lease term of approximately 16.7 years. That’s assured revenue for almost 17 years! Businesses would kill for such predictability. 

And this predictability has enabled IIPR to issue dividends to its investors. The company sports a dividend payout of 2.93% and it just increased its dividend payout for the tenth time since its IPO in December 2016. On March 15, the company declared a first quarter 2021 dividend of $1.32 per share of common stock, representing an approximately 6% increase over IIP’s fourth quarter 2020 dividend of $1.24. The dividend is equivalent to an annualized dividend of $5.28 per share. The company closed at $186.55 on April 1 and analysts have given it a target of $217.17, an upside of over 16%. IIPR stock has grown from $66.59 on March 30, 2020 to $ 186.55 today. This is a great stock to hold in your portfolio.

GrowGeneration (GRWG)

GrowGeneration owns and operates specialty retail hydroponic and organic gardening stores. It has 52 stores in 12 US states and also operates through its online superstore for cultivators at www.growgeneration.com and B2B ERP platform, www.agron.io. As more marijuana is consumed in the country, the demand for GrowGeneration’s products is growing. The company reported record full-year 2020 revenues of $193 million, versus $79.7 million in 2019, an increase of 143%. Full-year 2020 adjusted EBITDA of $19.2 million compares to $5.3 million in 2019. The stock has been on a tear and has grown 1,479$ since March 30, 2020 when it was trading at $3.2.

For 2021, the company upped its full-year revenue guidance to $415-$430 million, and its full-year adjusted EBITDA guidance was updated to $48 million-$51 million. For Q1 2021, revenue guidance was $86 million-$88 million. The company expects to reach over 60 Hydroponic garden centers and 15 states in 2021 and over 100 by 2023.

GrowGeneration, the largest chain of specialty hydroponic and organic garden centers, made its latest acquisition in March 2021, buying out Aquarius Hydroponics, one of the largest hydroponics retailers in New England, with annual revenues approaching $5 million.

The stock closed April 1 at $50.55 and analysts have given it a target of $56.57, an upside of almost 12% from its current levels. This is another great marijuana-ancillary stock to look at.

The Scotts Miracle-Gro Company (SMG)

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products in the United States and internationally. Essentially, it is a garden equipment provider. Scotts Miracle-Gro has been doing this for generations now. However, it is its subsidiary Hawthorne that is the real growth story in the cannabis space.

The company’s sales increased 105% in Q1 2021, ended January 2, 2021 to a record $748.6 million in its fiscal first quarter primarily driven by strong retailer support in the US consumer segment as well as continued momentum in Hawthorne. The company said it now expects fiscal 2021 sales growth of 1-6% compared to 0-5% previously. Hawthorne’s sales in Q1 increased 71% to $309.4 million.

The marijuana industry in the US is going to expand, one way or the other. Individual states will decriminalize cannabis as tax revenues from pot are hard to ignore. If legalization happens at the federal level, a lot of people and companies will be buying more equipment. Scotts Miracle-Gro is profitable and it pays out a dividend at 0.99%. The stock closed April 1 at $250 and analysts have given it a target of $273.

AFC Gamma (AFCG)

AFC Gamma is the newest kid on the stock exchanges having just listed on the bourses on March 19. The company provides institutional loans to cannabis companies across the US in all aspects of production: cultivation, processing, and distribution.

AFC Gamma is sitting in a very sweet spot. Banks don’t want to lend to pot companies. However, as this 2021 Leafly report says, “…because cannabis remains federally illegal, government grants and bank loans are not available. As a result, personal savings, family wealth, and second mortgages are the most common sources of start-up capital in the cannabis industry.”

The pot industry is going to grow and if banks are going to be hesitant, AFC Gamma can laugh all the way to the bank.