After a pretty awful May, marijuana stocks as a whole had a much better June, with the Horizons Marijuana Life Sciences ETF crawling higher by 2%. There’s potentially $75 billion in annual sales on the line by 2030, and investors don’t want to miss out on their chance for once-in-a-generation-type growth.
But as investors, we also know that not every company in a fast-paced industry can be a winner. Some have downright worrisome business models or income statements, while others seem to have overstepped their bounds in terms of valuation. As we march on with 2019, consider the following three pot stocks as “off-limits” for July…
Innovative Industrial Properties
Say what? Avoid what’s arguably the most profitable marijuana stock in the entire industry? Indeed, that’s what I’m suggesting — at least for the month of July.
Cannabis real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR) has been virtually unstoppable since the year began. Shares of the company have soared 166% through July 2. Investors are excited about the company’s two consecutive quarters of dividend hikes, as well as the doubling of the number of properties it owns over the past six months from 11 to 22.
Generally speaking, since this is a cannabis REIT that buys grow farms and processing sites, it’ll have relatively fixed costs. Therefore, the more properties acquired, the more net operating income (NOI) it’ll pocket. And the more NOI it generates, the bigger that dividend will grow. This is why IIP, as the company is also known, has grown its payout by 140% from the year-ago quarter.
While continuing to pile on the properties looks like a surefire way to larger profits and a juicier dividend, there’s one pretty sizable catch: REITs are constrained by their cash on hand. Since most of Innovative Industrial’s earnings get returned to shareholders in the form of a dividend, IIP leans on common stock issuances to raise cash. This is a pretty normal practice for REITs, and not just cannabis-focused REITs like IIP.
But as we know, issuing shares to raise cash can have a near-term negative impact on investors by diluting the value of their existing shares. IIP’s share price has risen 47% last month alone and the company has been aggressively acquiring new properties through the first six months of the year; therefore, the possibility of a cash raise via common stock offering is very high, in my opinion.
If you already own shares of Innovative Industrial Properties, I wouldn’t suggest doing much of anything right now, as the long-term business strategy remains firmly intact. But if you’re on the outside looking in, my suggestion would be to wait for a more attractive entry point…
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