Pop quiz: During the 19th century San Francisco gold rush, which fortune hunter went on to achieve the greatest fame and wealth?

Cue game show music…

Answer: Dry goods proprietor Levi Strauss, inventor of the quintessential American garb.

Okay, that was a trick question. The point is this: when the era’s gold-crazed prospectors flocked to the West Coast, like Bogie’s grizzled gang in The Treasure of the Sierra Madre, most of them came up with zip, zilch, nada. The people who really made money were the entrepreneurs who supplied the picks and shovels or, in Levi’s case, the blue jeans.

That’s why, during the 21st century marijuana green rush, I especially like the “pick-and-shovel” plays on the marijuana boom. These companies are infrastructure stocks that can be wildly profitable.

Marijuana investing can be risky, but you can seek greater safety by focusing on the ancillary firms that provide infrastructure services for growing pot, in either the recreational or medicinal segments.

Pick-and-shovel plays can be reliable money-makers, because they provide essential value-added services. What’s more, they usually enjoy a diversified roster of clients in several different industries, which buffers them from the inherent volatility of the marijuana business.

As pick-and-shovel plays thrive, they’re fueling tremendous and widely varied jobs growth in the marijuana industry (see chart).

In this bonus chapter to my book, The Wide World of Weed and Psychedelics, I examine areas of marijuana that qualify for pick-and-shovel status. These are marijuana-related products and services that “don’t touch the plant.” As such, they’re vulnerable to less risk from federal anti-cannabis prosecution, and they must abide by fewer state and local regulations. They’re the picks, shovels, and blue jeans of the marijuana industry.

Just Add Water: Hydroponics Upends Pot Farming…

Among marijuana infrastructure companies, some of the more promising firms deploy controlled environment agriculture systems that are designed to use as little land, water and energy as possible. They market themselves as eco-friendly as well as more cost-effective.

These companies have designed vertical farming solutions that use the latest pot growing techniques. Which brings me to one of the hottest trends in not just marijuana growing but all of agriculture: hydroponics.

Better weed, with less hassle. That’s the goal of marijuana growers. An increasing amount of marijuana is being grown not in soil but in windowless warehouses, aka vertical farms. These futuristic growing environments manipulate light, humidity and temperature to grow cannabis. Added to the mix is nutrient-rich water, via hydroponics.

Hydroponics allows marijuana growers to grow better weed in less space and with less labor. Venture capitalists are excited about this trend and they’re pouring money into hydroponic-enabled vertical farms that grow pot.

According to Grand View Research, the global hydroponics market was valued at USD 1.33 billion in 2018 and is expected to grow at a compound annual growth rate of 22.52% from 2019 to 2025 (see chart).

Data that breakdown the percentage of hydroponics specifically devoted to marijuana farming are elusive. But generally speaking, hydroponic operations represent the next generation of marijuana agriculture. They foster perfectly balanced growing conditions via artificial intelligence, data analytics and other sophisticated techniques. Technology companies that provide proprietary software for marijuana hydroponics are thriving.

These vertical hydroponic farms are emerging at an inflection point in global agriculture. Extreme weather events this year almost certainly would not have occurred if not for global climate change, a scientific group recently reported.

Whether the culprit for the rising incidence of scorching heat and “super storms” is man-made climate change or natural cycles, severe and unpredictable weather is a new global reality.

Pollution, overcrowding, urbanization, topsoil erosion, and the heightened frequency of droughts is prompting open-field farmers to seek technological solutions to growing crops. One of the advantages of hydroponics is that growing isn’t constrained by the weather or the seasons.

So far in 2022, more than 2,300 farms are growing hydroponic crops in the U.S. and their number is rapidly expanding. In 2020, $929 million was invested into U.S. indoor-farming enterprises, more than double the level of investment in 2019, according to the latest data from PitchBook.

These new systems produce sanitary marijuana and other crops, without pesticides. Welcome to the Brave New World of ag-tech.

My favorite stock in marijuana hydroponic farming: GrowGeneration (NSDQ: GRWG). With a market cap of $558 million and based in Colorado, GrowGeneration owns and operates retail hydroponic and organic gardening stores in the U.S. It engages in the marketing and distribution of nutrients, growing media, and advanced greenhouse lighting.

GrowGeneration develops, markets and sells (both retail and wholesale) indoor garden systems. The firm uses proprietary seed kits to grow flowers and vegetables, targeting both experienced and amateur gardeners.

GrowGeneration supplements its product line by selling support accessories, such as lights, environmental control systems, vertical benching, and accessories for hydroponic gardening, as well as other indoor and outdoor growing products. The average analyst expectation is for GrowGeneration to rack up year-over-year earnings growth next year of a whopping 400%.

Ancillary Products…

I also like micro-cap Greenlane Holdings (NSDQ: GNLN), which last year merged with KushCo Holdings (the latter formerly traded under the OTC ticker KSHB). Greenlane has a market cap of $50 million.

The combined company, operating as Greenlane, merged two of the early cannabis ancillary product and service companies.

Greenlane develops and distributes cannabis accessories, child-resistant packaging, vape solutions, and lifestyle products in the U.S., Canada, and Europe.

The average analyst expectation is for Greenlane to post year-over-year earnings growth next year of 85.7%.

Holding the Patent…

Don’t forget a basic fact: marijuana is just a plant. It’s a commodity. As such, growing marijuana or squeezing various oils from the plant aren’t the surest ways to profit from the green rush.

As legal restrictions against marijuana are increasingly removed, the weed is becoming commoditized and subject to downward price pressures. The most profitable companies in the marijuana industry will be those that develop a proprietary technology that they can patent.

Which brings me to Jazz Pharmaceuticals (NSDQ: JAZZ). In early 2021, Jazz acquired GW Pharmaceuticals, which formerly traded under the NASDAQ ticker GWPH.

GWPH’s primary product is Sativex, an oromucosal spray for the treatment of multiple sclerosis, cancer pain and neuropathic pain. Sativex (scientific name nabiximols) was the first natural cannabis plant derivative to gain market approval in any country.

GW Pharmaceuticals also offers Epidiolex, which treats rare and resistant forms of pediatric epilepsy. The company has been marketing the breakthrough drug in more than 20 countries outside of the U.S., through partnerships with Big Pharma.

Epidiolex received the stamp of approval from the U.S. Food and Drug Administration in June 2018. Now that it’s available in both the U.S and overseas, this drug is a potential blockbuster.

GWPH has other patented products in the pipeline, including therapies for glaucoma and schizophrenia, and a potential treatment for a particularly aggressive form of brain cancer.

Jazz develops other non-marijuana drugs. The company identifies, develops, and commercializes pharmaceutical products for various unmet medical needs in the U.S., Europe, and internationally. Right now, GWPH is the growth engine for Jazz. With a market cap of $11 billion, far larger than most pharmaceutical companies focusing on cannabis, Jazz could emerge as the next “Amazon” of medical marijuana.

In a similar vein, I also like Tilray Brands (NSDQ: TLRY). With a market cap of $3.3 billion, Tilray provides medical and recreational cannabis products; pharmaceutical and wellness products; beverage alcohol products; and hemp-based food and other wellness products.

Tilray makes a variety of drug treatments for medical uses. These products are based on tetrahydrocannabinol (THC) and cannabinoid (CBD) compounds, which are extracted from marijuana.

Tilray makes THC-dominant, CBD-dominant and THC/CBD balanced treatments. The THC and CBD potencies are directly reflected in the company’s products, which can be administered or consumed via several methods. Tilray also sells accessories, such as vaping tools.

Tilray is headquartered in Nanaimo, British Columbia, with operations in Argentina, Australia, Canada, Chile, Croatia, Cyprus, the Czech Republic, Germany, New Zealand, South Africa, and the U.S.

I especially appreciate Tilray’s partnership with Novartis (NYSE: NVS) subsidiary Sandoz, to sell, distribute and co-brand Tilray’s non-smokable/non-combustible medical cannabis products in legal markets worldwide.

The Novartis/Sandoz partnership is a significant competitive advantage, allowing Tilray to piggy-back an entrenched sales, marketing and health-care delivery network.

The Rise of the “Bud and Breakfast”…

Marijuana tourism, dabbed with the patina of the wellness industry, is a booming business. If you want your share of the investment spoils from this trend, you need to be proactive.

Emerging as a significant cottage industry is marijuana-enhanced recreational tourism. As marijuana is increasingly legalized in the U.S. and around the world, weed is invading the daily lives of consumers.

We’re seeing a proliferation of shaman-led tours, five-star resorts, and best-selling travel guides all predicated on marijuana as a tourist activity. It’s a reminder that capitalism is ingenious at co-opting and monetizing every conceivable experience.

My favorite play on this trend: Leafbuyer Technologies (NSDQ: LBUY), increasingly known as the “Priceline of Marijuana Tourism.”

With a market cap of $4.8 million, micro-cap Leafbuyer provides online resources for cannabis deals and specials in the U.S. The company’s partnerships with other web sites have created a national network of cannabis deals and information that reaches millions of consumers every month, especially those seeking to engage in “green tourism.”

In Leafbuyer’s most recent quarterly results (for the fiscal quarter ending December 31, 2021), revenue rose 53% on a year-over-year basis, and gross profit increased from $115,746 to $261,770 in the same period.

The Right REIT…

You should also consider marijuana-linked exchange-traded funds that target a specialized niche. I’m especially keen on NewLake Capital Partners (NLCP). With a market cap of $523 million, NLCP sports a dividend yield of 5.53%.

NewLake Capital Partners is a leading provider of real estate capital to state-licensed cannabis operators. That’s a hot, specialized market. The following chart shows NewLake’s recent (and explosive) earnings growth:

There’s an increasing partnership between the marijuana industry and real estate infrastructure.

Investors are buying up warehouses and retail space (much of it shuttered by bankruptcy proceedings) in states that have legalized marijuana, according to recent research from the National Association of Realtors (NAR).

Empty factories and other industrial facilities are getting scooped up by marijuana businesses, but among the most popular are abandoned “big box” retail stores. For pot companies, the sizes and locations of these empty stores are advantageous. And they’re cheap, to boot.

NAR found that in states where medical and recreational marijuana use is legal, 35% to 36% of its members had seen an increased demand in warehouses, 23% in storefronts, and 18% to 28% in land.

NAR also found that 29% of commercial members in states that legalized recreational marijuana reported an increase in property purchasing over leasing.

Real estate companies specializing in dispensaries, law firms focused on changing marijuana laws, and investment firms looking to inject capital and reap a profit are springing up, often working in concert. NewLake is tapped into this trend.