3 Large-Cap Stocks With Surprising Exposure to an Explosive Sector

© Provided by The Motley Fool 3 Large-Cap Stocks With Surprising Exposure to an Explosive Sector

The cannabis market will be worth nearly $200 billion by 2028, according to estimates from Fortune Business Insights. It’s a promising growth opportunity for companies to expand their operations. However, since cannabis remains federally illegal in the U.S., large corporations are generally hesitant to invest in the sector — but there are some exceptions.

Three companies that have exposure to the industry are retailer Alimentation Couche-Tard (OTC: ANCT.F), Unilever (NYSE: UL), and Colgate-Palmolive (NYSE: CL). Although they aren’t directly selling cannabis products, here’s how they’re tied to the industry.

1. Alimentation Couche-Tard

One retailer that’s eager to sell pot in its stores is Alimentation Couche-Tard, the company behind the popular Circle K convenience stores. Even in Canada, where the company is based and where pot is legal federally, it can’t just add marijuana to its store shelves. The next best thing is to own a pot shop.

The company has already taken steps to do that. In 2019, it invested approximately 26 million Canadian dollars to acquire a 9.9% stake in cannabis retailer Fire & Flower. Since then, it has been adding to its position and, through warrants, now owns 35% of the business.

For a large company like Couche-Tard that has generated nearly $60 billion in revenue over the past 12 months, this is still a fairly small investment. In its fiscal year ending Jan. 29, Fire & Flower reported just CA$175.5 million in sales and a loss of CA$63.6 million. Cannabis isn’t suddenly going to drive a lot of growth for Couche-Tard, but the move to invest in a pot retailer may be a possible first step to potentially even more acquisitions down the road; many cannabis companies are struggling and would love an influx of cash and a partner like Couche-Tard.

Couche-Tard’s exposure to the sector is still much more direct than the other stocks on this list and it may be your safest way of investing in cannabis without having to actually buy a pot stock.

2. Unilever

U.K.-based consumer goods company Unilever sells a variety of products, including food, personal care, and home care. Some of its more popular brands include Dove, Noxema, and Degree. There’s also Schmidt’s, a company that has shown interest in the cannabis industry.

Unilever acquired Schmidt’s Naturals in 2017. And a few years ago, Schmidt’s launched deodorant products that contain cannabidiol (CBD) derived from hemp. Hemp-based CBD products aren’t federally legal in the U.S. and were made permissible through the passing of the Farm Bill in 2018. It’s a smaller subset of the cannabis industry, but still part of it nonetheless. Another of Unilever’s brands, Ben & Jerry’s, doesn’t sell any ice cream that contains marijuana, but the company is interested in offering cannabis-flavored products. In 2019, it said CBD-infused ice cream would available “as soon as it’s legalized at the federal level.”

There isn’t much in the way of revenue from the cannabis sector that’s flowing through to Unilever today, as it’s going to be limited to just the hemp products that Schmidt’s sells. For a business that reported more than 52 billion euros in sales last year, it’s not a huge part of Unilever’s business today (it makes no mention of hemp or cannabis on its earnings report). But this could also be a way for risk-averse investors to potentially gain exposure to the sector.

3. Colgate-Palmolive

Colgate-Palmolive owns Hello Products, a company that’s focused on personal care. And on Hello Products’ website, there is a section devoted to hemp-based CBD products, which includes toothpaste and lip balm that the company sells.

The parent company doesn’t shy away from its interest in CBD either, as on its own website, Colgate-Palmolive highlights the benefits of using CBD on oral care (while at the same time saying there isn’t “conclusive evidence”). Reducing the risk of cavities, fighting bad breath, and relieving sensitivity are some of the examples it lists.

Colgate-Palmolive is another example of a company that’s merely dipped its toes in the cannabis industry. But that’s as far as it can go for now. The company’s favorable view of CBD in oral care, however, suggests that Colgate-Palmolive could offer more such products in the future, once legal obstacles are out of the way.

The company’s revenue totaled $17.4 billion last year and in four years has risen by less than 13%. Any sort of growth catalyst could be useful for Colgate-Palmolive, and that’s why it may not be a surprise if the company goes deeper into cannabis-based products once it’s legal to do so. It makes for another good stock to buy if you want to potentially benefit from the marijuana sector’s long-term growth.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alimentation Couche-Tard Inc. The Motley Fool recommends Unilever. The Motley Fool has a disclosure policy.