There’s tremendous momentum in the legal cannabis sector right now.
The boom is crackling with excitement and flush with money, reminiscent of the old California Gold Rush.
Last month, for instance, it was reported that the 50 licensed marijuana retailers in Nevada, which only went “fully legal” on July 1, are already running out of marijuana to sell.
And California is less than six months from opening a legal, recreational market that will dwarf all other legal weed states, plus the entire nation of Canada.
I’ll tell you why I’m expecting monster profits there in a minute.
But… one of my favorite legal weed plays has been in the news lately for an entirely different reason.
Now, it’s not a grower, and it’s not a retailer (I save those recommendations for my paid-up Nova-X Report subscribers as part of a comprehensive, well-balanced, 30-stock weed portfolio), but it will be one of the biggest, most important players in this boom sector, especially when California lifts the curtain on its market.
And I couldn’t be happier with the price we’re getting here…
The “Green Rush” Is Very Real
Comparing the legal cannabis sector to the legendary 1850s California Gold Rush might seem like hyperbole, but it’s no idle boast.
Sure, plenty of forty-niners struck it rich, but the real fortunes went to the folks who sold the prospectors the things – tools, clothes, food, housing – they needed to chase their dreams of gold riches.
In fact, this is where we get the term “pick-and-shovel play” from.
Levi Strauss is a famous example. The Bavarian immigrant didn’t pull an ounce of gold out of the ground, but he sold dry goods and, of course, well-made, reasonably priced denim overalls to the surging crowd of gold seekers hitting San Francisco at the time.
Today, Levi Strauss & Co. is a globally recognized brand (and a $4.5 billion company). You can’t buy its stock, but I’m willing to bet you’ve bought more than a few pairs of jeans from Strauss’ heirs.
In 2017, the profit potential in marijuana isn’t much different… except for the fact that there’s exponentially more money to be made.
Just like in the 19th century, 2017’s “pick-and-shovel” cannabis plays will mint millionaires.
You can be one of them…
When Regulations Are Good for Stock Prices
Just a few weeks ago, I attended the fourth annual Cannabis Business Summit and Expo in Oakland, Calif., on the north end of Silicon Valley. I tend to think of “Oaksterdam” as the “spiritual home” of the legal weed movement because of the initial successes that legalization advocates and activists had there in forming California’s long-established medical marijuana industry.
The hottest profit trend on display at the expo wasn’t growers, or dispensers, or even edibles, but compliance.
You see, it varies from state to state, but the legal cannabis industry has voluntarily embraced some pretty stiff regulatory regimes, not only to satisfy opponents like weed “Flat-Earther” Jeff Sessions, our U.S. Attorney General, but also to ensure people are kept safe as they consume the product and to make sure everything is dealt aboveboard.
Regulation in this case is a boon for investors, because the regulations generate a very real need for other firms to come aboard and offer their expertise, by way of products and services, in a way that boosts bottom lines.
With regulations thick on the ground, you can see that compliance is critical. In some cases, a company that makes just one wrong compliance move can face severe legal sanctions that could damage its reputation and cripple the business, so there’s a real incentive here for getting it right the first time.
Many pot entrepreneurs lack the knowledge and experience necessary to comply with all state and local regulations, from employment and labor laws to inventory control and everything in between.
We’re talking about a market likely to top $35 billion in three years. The stakes are just too high to leave anything to chance.
Entrepreneurs are turning in droves to the one company that can make it all easy for them…
That’s why I love Microsoft Corp. (Nasdaq: MSFT) in this space.
Mr. Softy Toughens Up
The Redmond, Wash.-based tech juggernaut was quick to spot the opportunity in the legal cannabis sector thanks largely to savvy CEO Satya Nadella.
Microsoft has marketed its cloud-based services heavily to players in the sector, and it’s beginning to pay off. Its Azure cloud service banked $6.7 billion in the most recent quarterly reports.
Here’s where California’s recreational weed market comes in. Now, its medical marijuana market alone accounts for some 33% of all legal sales in the United States.
Conservative estimates suggest California’s new market will be worth $1.57 billion in the first year after legalization, before it triples by the early 2020s.
And all the state’s vendors are going to need the product that Microsoft is laser-focused on right now.
This is a huge profit catalyst for “Mr. Softy” that really makes the case for owning it now.
Of course, Microsoft got hit in the “tech wreck” last month that sent shares of some of the best, most innovative tech firms tumbling.
A lot of them have yet to recover any serious steam. Microsoft, in particular, took another hit recently when Nadella announced he was putting 3,000 jobs on the chopping block. The media – which, let’s face it, typically has a negative knee-jerk reaction to layoffs – read this move as an impending corporate profit crisis.
I read it as an incredibly smart move.
You see, Microsoft is still in fundamentally great shape, even accounting for the tech wreck. What Nadella is doing here is, in essence, doubling down on the company’s cloud efforts. He’s concentrating efforts and freeing up the capital and headspace needed to bring serious firepower to bear on the lucrative cloud niche.
Azure cloud sales grew a whopping 93% last quarter, toward that $6.7 billion I mentioned earlier. It makes perfect sense for Microsoft’s leadership to want to grow and steward that rich revenue source, to do whatever they can to see it thrive.
The firm’s Azure cloud computing division surged 97% this past quarter from the year-ago period.
When the firm predicted two years ago that it would generate $20 billion in cloud revenue by fiscal 2018, many on Wall Street thought it was an impossible target. The current run rate is already now up to $18.9 billion, meaning it’s clearly on track to do so.
Give credit to Nadella. When he took control of Microsoft in early 2014, the stock and its management were laggards. But Nadella would have none of that.
In particular, he told his troops to make the firm a major cloud player. He knew it was a key tech mega-trend that had money written all over it.
And he didn’t think Amazon.com Inc. (Nasdaq: AMZN) should own the market free and clear with its Amazon Web Services.
While Microsoft has yet to match Amazon dollar for dollar in this fast-growing tech segment, its recent track record has gotten Wall Street’s attention.
“They are the undisputed No. 2 in the hyperscale public cloud market, and it will be extraordinarily difficult for anyone to catch them,” a Stifel analyst told The Wall Street Journal last week.
Frankly, Microsoft delivered a great quarter with across-the-board-fueling earnings that were 38% ahead of forecasts. Not to mention that net income more than doubled in the quarter.
That means now is the time to “Accumulate” a bigger position.
— Michael Robinson
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Source: Money Morning