When you are in the early days of a sector like marijuana, many of the stocks can be quite volatile.
So I recommend taking a “portfolio approach.”
Sure, you gamble on some, as we call them in the business, “tiny pot stocks.”
But you also put a lot of your money on the biggest and best marijuana “pure plays.” Those are the companies that will produce revenue for years to come… or will get acquired by a beverage, tobacco, or pharmaceutical company looking to get in on this exciting sector.
That way you reduce your risk.
Then you lower your risk further by investing “pick and shovel” plays – seasoned firms that provide ancillary services to pot firms. These companies have other, and in many cases much larger, sources of revenue.
And with them, you can set yourself up for more steady gains.
For instance, take a look at Microsoft Corp. (Nasdaq: MSFT). It’s a global giant in PC software and cloud computing. This tech legend has also dipped its toes into the cannabis industry by offering software that cannabis firms use for tracking regulatory compliance.
Then there’s Scotts Miracle-Gro Co. (NYSE: SMG). Already the world’s largest maker of lawn care and gardening products, Scotts is now making a big push into indoor plant cultivation. It got started in 2015 by buying General Hydroponics. And in April, Scotts acquired, for $450 million, hydroponics company Sunlight Supply in April.
The company is folding Sunlight into its Hawthorne Gardening unit – the division that holds Scotts’ hydroponic and other marijuana cultivation assets. Scotts expects Hawthorne to post annualized sales of roughly $600 million this year. That’s more than double from 2017.
And now we can add PerkinElmer Inc. (NYSE: PKI) to our growing list of backend cannabis plays…
Critical Cannabis Testing
For its part, PerkinElmer is already showing itself to be a valuable resource to the cannabis industry.
Its cannabis testing facilities are second to none, and are a new growth driver for the 81-year-old firm.
PerkinElmer has built its name on machines that use light and other sensors to perform all kinds of industrial tests. That core tech has been repurposed for cannabis.
To be clear, legal marijuana, whether for medical or recreational use, is very carefully inspected in order to meet state and, in the case of Canada, national guidelines. Potency levels must be within specific ranges, and the plant must be free of harmful toxins, mold, yeast, and pesticides.
Growers also need to prove that all of the chemicals used in cultivating marijuana have been removed by the time the product is ready for sale.
And since this field is still fairly new, testing standards keep getting tweaked, leading to more demand for the advanced testing and diagnostic equipment that PerkinElmer sells.
For instance, Oregon requires legal weed to be free from 59 different pesticides. In California, regulators began testing cannabis on July 1, and initially found that nearly 20% of the products tested failed for potency and purity requirements. A much smaller number of products were found to have contained unacceptable levels of pesticides, solvents, and bacteria.
So you can see why cannabis companies are going to flock to testing experts like PerkinElmer to ensure the integrity of their products going forward.
“The cannabis industry is evolving at an incredible rate,” says Carl Carnagey, CEO of Oregon-based cannabis testing firm Juniper Analytics, a PerkinElmer client. “I’m sure I’m not the only one who leaves work on a Friday night, only to come back to a world of changes on Monday morning.”
PerkinElmer’s growing roster of cannabis clients can choose from a range of testing tools, including the firm’s QSight Triple Quad line. As marijuana is passed through this system’s sensors, any impurities can be picked out and identified. The grower re-treats the cannabis to remove those impurities and tests them once again.
Make no mistake. Pot growers don’t just comply with all the testing regulations because they have to. They know that proven product is a strong sales tool with quality-conscious consumers.
A Wide Range of Businesses
Now, there’s a lot more to PerkinElmer than just cannabis. The firm is a leader in food safety and environmental analytics.
More recently, the company has made a major push into medical diagnostics as well. In May 2017, it acquired Euroimmun Medical Laboratory Diagnostics for approximately $1.3 billion. The move helped PerkinElmer build leading positions in autoimmune and allergy diagnostics. The acquisition also strengthens the firm’s leadership in China and other emerging markets.
PerkinElmer has paired that big purchase with a strong internal R&D effort, which has led to a fully refreshed product line.
That brings a pair of key impacts.
- Profit margins have been growing at around one percentage point each year as the firm can pass along higher prices for more advanced systems.
- And more leading-edge systems are helping to drive sales roughly 25% higher this year, which will be the firm’s best showing in more than a decade.
Robust demand in the firm’s Discovery and Analytic segment (where its cannabis testing business also resides) is leading the revenue surge. And PerkinElmer is also seeing double-digit sales gains in its Life Sciences segment.
In yet another sign of momentum, PerkinElmer has topped Wall Street forecasts by a growing amount in each of the past four quarters.
Look for profits to rise around 25% this year, and at a mid-teens clip next year as well.
Looking for – and Finding – Growth
The fact that PerkinElmer has swiftly pivoted toward the fast-growing cannabis quality testing market tells you one thing. This firm’s core skill-set can be deployed in new areas without a massive new engineering effort.
And that sets the stage for more growth drivers to emerge as the firm taps new markets that require precise and complex levels of testing and analytics.
Still, this firm is in focus here today because it has emerged as one of the most solid pick-and-shovel plays on cannabis.
Not to mention the fact that it’s a market crusher. Over the last year, PerkinElmer rallied 39.7%, more than doubled the S&P 500’s 16.8% return.
As the trend to legalize marijuana spreads across North America, and then onto the rest of the world, PerkinElmer’s presence in 130 countries stands as a great calling card.
In other words, with this winner we get ballast for our cannabis portfolio – and big gains. Full story at Strategic Tech Investor
Now, there’s an even quicker way to realize big gains from the best cannabis stocks on the market. In a matter of days – on Oct. 17 – Canada will go fully legal, allowing adults across that nation to purchase marijuana from a shop or order it online.
Deloitte anticipates Canada’s cannabis market will reach $22.6 billion over the next couple of years. For savvy investors, that could amount to $2 million in winnings – in just the next 12 months.
This new generation of marijuana millionaires knows which companies are best positioned to crush the market. And you can get more details about them here.
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