5 Reasons to Buy Small-Cap Pot Stocks Instead of Large-Cap Marijuana Stocks

The marijuana industry has blossomed in front of our eyes in a very short amount of time. This decade alone, we’ve witnessed 10 U.S. states give the green light to recreational weed and stood in awe as Canada ended nine decades of recreational marijuana prohibition this past October. Once a taboo topic that was swept under the rug by legislators, the cannabis industry is now a legitimate business model that’s ripe for investment.

Just how big could the pot industry become? Well, that depends on your preferred source. Investment firm Cowen Group foresees $75 billion in worldwide sales by 2030, with Arcview Market Research and BDS Analytics calling for as much as $31.3 billion in global sales by 2022. For context, this duo estimated 2018 worldwide sales at $12.8 billion. Whichever source you prefer, the bottom line is that there are a lot of revenue dollars to go around and presumably big profits to follow.

The big question is and remains: Which pot stocks should you buy…

Forget brand-name marijuana stocks and focus on small-caps

Mid-cap and large-cap marijuana stocks have been the preference of investors up to this point. Names like Canopy Growth (NYSE:CGC)Aurora CannabisTilray, and Cronos Group(NASDAQ:CRON) have left many of their peers eating dust. But are these really the pot stocks you should own going forward? My argument would be that they aren’t.

Rather, I see considerably more opportunity in small-cap marijuana stocks (think $200 million to $1.5 billion in market cap). Here are five solid reasons to buy small-cap pot stocks instead of the well-known quartet mentioned above that Wall Street can’t seem to get enough of.

1. Small-caps have a better chance of being profitable

Arguably the top reason to consider small-cap marijuana stocks is that the few companies that have been profitable in early going are considerably smaller in size. Think about this for a moment: Canopy Growth has lost more than 400 million Canadian dollars through the first nine months of fiscal 2019, yet Wall Street has anointed the company with a $16 billion-plus market cap. Does that make sense? Fundamentally, not one bit!

Instead, consider real estate investment trust (REIT) Innovative Industrial Properties(NYSE:IIPR) as a pot stock you can trust. A cannabis REIT is a company that acquires land with growing and/or processing facilities and then leases these assets out for an extended period of time. In Innovative Industrial Properties’ case, it has a dozen properties in 10 states, and its original leases range between 15 and 20 years, lending to predictable long-term cash flow. Plus, each lease comes with a built-in 3.25% annual rent increase and a 1.5% management fee tied to the base rent. This means the company can grow via acquisition as well as organically.

Innovative Industrial Properties, while relatively small ($640 million market cap), has been profitable for more than a year now and has raised its quarterly dividend twice since going public in December 2016 on the New York Stock Exchange. You won’t find a large-cap pot stock that can deliver results like these…

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