Many if not most investors realize marijuana is a monster opportunity waiting to happen even if some early cannabis stocks have seen their momentum evaporate even before the industry got going…
Others, though, are proving to be dynamos that are running strong now and will be difficult to contain once the floodgates of federal marijuana legalization are opened. Here’s why Innovative Industrial Properties (NYSE:IIPR), Scotts Miracle-Gro (NYSE:SMG), and Jushi Holdings (OTC:JUSHF) are already on the move and why investors will find they just keep growing.
Real estate, real powerful growth
Eric Volkman (Innovative Industrial Properties): My pick is an atypical one as it’s a marijuana company that doesn’t directly grow or sell a single ounce of weed. Instead, it’s a real estate investment trust (REIT) that concentrates exclusively on owning and leasing properties for the marijuana industry. Say hello to one of the more offbeat companies on the cannabis scene — Innovative Industrial Properties.
Plowing money into Innovative is a neat way to invest in cannabis without being directly exposed to the cultivation, processing, and retailing sides of the business.
Whatever its focus, every marijuana company needs property in which to conduct its operations. These include grow rooms, beverage factories, dispensaries, and a clutch of other specialty properties. As such, it helps to have a landlord that is a specialist, and that landlord is Innovative.
Another item in short supply for many marijuana businesses is capital, given the frequently unprofitable nature of the industry. One very clever aspect of Innovative’s operations is that it pushes sale-leaseback deals in which a company sells a property to a REIT then immediately leases it back from the new owner.
When done right, a sale-leaseback deal is a win-win, with the seller reaping a pile of capital from the sale and Innovative gaining a new asset for its ever-growing portfolio.
The company isn’t the only weed REIT on the scene, but it’s by far the most prominent. As such, it’s a go-to operator for many top cannabis companies. Innovative’s long list of tenants include some of the top names in the industry, such as Trulieve Cannabis, Curaleaf, and Green Thumb Industries.
All are ambitious companies looking to build scale and happy to lease more property from their favorite landlord. Combine that with the legalization wave that is currently surging across the U.S. and it’s clear that Innovative is standing in front of a long and potentially very significant growth story.
So far, the company has done a fine job of expanding its portfolio and, therefore, its overall business. Revenue ballooned from around $267,000 in 2016 to just under $117 million last year. In 2020 alone, adjusted funds from operations (AFFO), a critical profitability metric for REITs, more than doubled year over year, rising to over $32 million.
Consistent bottom-line profits such as the ones Innovative delivers are very much the exception rather than the rule in the pot business. And in the REIT world, profitability means dividends since such companies are obligated to pay out nearly all of their net profit in this form of shareholder remuneration. Innovative has raised its payout for five quarters in a row; over that stretch of time it has grown 40% to $1.40 per share.
With its strong historical performance, its strong position on the market, and the opportunities directly in front of it, Innovative is one pot stock with a glaringly bright future.
It pays to sell “shovels” during the cannabis gold rush
Alex Carchidi (Scotts Miracle-Gro): Scotts Miracle-Gro won’t stop growing because it’s selling exactly what other cannabis companies need to cultivate their crops. Via its marijuana-focused subsidiary, Hawthorne Gardening Company, Scotts plies its customers with everything from plant food to the hydroponics systems needed for indoor growing facilities. Wherever marijuana is — or will soon be — legal in the U.S., its retail centers are already in operation in anticipation of future demand. Plus, it sells a cornucopia of consumer gardening products too, so its business is somewhat diversified.
Over the last five years, Scotts’ quarterly revenue has grown by just over 676%. Importantly, management expects 2021 to be the company’s best year ever in terms of both revenue and earnings even in the face of a challenging distribution environment which could squeeze gross margins. So far, it isn’t hard to see why they’re optimistic.
In the third quarter, Hawthorne’s revenue soared by 48%, reaching $421.9 million. If it continues at its present rate, growth like that could make sales of marijuana cultivation products eclipse those of the consumer gardening segment, which was worth $1.05 billion in the same quarter. Given that the market for consumer gardening gear probably isn’t growing as quickly as the market for cannabis, that would be more good news for shareholders.
As the marijuana industry scales up to match consumer demand in the U.S., Scotts will continue…
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