For a number of years, marijuana stocks were the hottest investment on Wall Street. Investors could seemingly throw a dart at a list of publicly traded pot stocks and come out a winner. But that’s not the case any longer…
Over the past 14 months, cannabis stocks have been mired in a fairly precipitous downtrend that’s been brought on by regulatory-based supply concerns in Canada, high tax rates on legal product in the U.S., and financing worries throughout North America. In many instances, we’ve seen pot stock valuations fall by 50% or more from where companies ended the first quarter of 2019.
To add to this misery, the coronavirus disease 2019 (COVID-19) pandemic has complicated matters for the industry. The shutdown of nonessential businesses in certain states and provinces has forced retailers to adopt a delivery-only or curbside-pickup model. In other words, it’s just piling on the challenges that marijuana stocks are facing.
Yet, in spite of these hurdles and the COVID-19 pandemic, there are still four pot stocks on track to generate a full-year profit in fiscal 2020. Though things could obviously change, the following four cannabis pure-plays look to be among the most fundamentally sound of their peers.
Innovative Industrial Properties
The hands-down most profitable pot stock on a per-share basis is real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR). Like any REIT, its purpose is to acquire assets (in this case cannabis cultivation and processing sites) that can be leased for long periods of time.
As of mid-May, Innovative Industrial Properties had 56 assets in 15 different states in its portfolio. For context, it began 2019 with 11 assets, meaning it’s really beefed up its cannabis rental portfolio over the past 17 months. The best part is the weighted-average lease length of these assets is 16 years, with the company last reporting a yield on invested capital of better than 13% during the first quarter. At these returns, Innovative Industrial Properties will net a complete payback on its invested capital in less than six years.
Another factor working in IIP’s favor is the lack of access to basic banking services for cannabis companies in the United States. With multistate operators (MSO) needing cash to bolster their balance sheets, they’ve regularly been turning to IIP to execute sale-leaseback agreements. Under these deals, IIP purchases a property from an MSO in cash, but immediately leases the property back to the seller for between 10 and 20 years. Both sides win, with the MSO netting much-needed cash and IIP gaining a long-term tenant.
With COVID-19 unlikely to seriously disrupt Innovative Industrial Properties’ rental model, look for the company to be quite profitable in 2020.
Green Thumb Industries
Although Wall Street has it eking out only a very small per-share profit in 2020, U.S. MSO Green Thumb Industries (OTC:GTBI.F) definitely looks to be trending the right way with its bottom line, even though COVID-19 has made operating cannabis stores challenging.
Green Thumb has 45 currently operational dispensaries, with licenses to open as many as 96 stores in a dozen states. Were it not for COVID-19, Green Thumb’s profitability in 2020 probably wouldn’t be in question. It’s opened a number of locations in Illinois, which began adult-use weed sales on Jan. 1, 2020, and it’s moved into the tourist-heavy Nevada market, which could feature the highest per-capital cannabis spending by mid-decade.
Green Thumb has also leaned heavily on derivatives to drive its growth. Derivatives are alternative consumption options, such as edibles, vapes, infused beverages, concentrates, and topicals. Derivatives offer substantially juicier price points and margins than dried cannabis products, which is great news given that roughly two-thirds of Green Thumb’s sales are generated from non-flower products.
Though profitability isn’t guaranteed considering that Green Thumb is spending aggressively to open new stores in core markets, it appears likely to happen in 2020.
The only Canadian pot stock that looks to have a clear path to profits in 2020 is extraction-service provider Valens (OTC:VLNCF). Though per-share estimates have fallen over the past three months, Wall Street is still looking for $0.23 Canadian per share in 2020 profit.
Valens finds itself in great position as…
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