Last year, cannabis stocks entered the mainstream, thanks to the legalization of recreational marijuana in Canada and the increasing momentum of the legalization movement in the United States.
Investor interest in this space remains in high gear, driven by strong performances among some stocks in the sector and the group's powerful projected long-term growth dynamics.
While all pure-play cannabis stocks are risky, two of the higher-quality names in this sector, in my view, are Canada-based grower Canopy Growth (CGC -3.01%) and cannabis industry-focused real estate investment trust Innovative Industrial Properties (IIPR -0.82%).
Image source: Getty Images.
Overview
|
Company |
Country |
Market Cap |
Profitable (TTM)? |
Dividend |
YTD 2019 / 2-Year Performance* |
|---|---|---|---|---|---|
|
Canopy Growth |
Canada |
$14.2 billion |
No |
N/A | 53.3% / 614% |
|
Innovative Industrial Properties |
U.S. |
$1.1 billion |
Yes |
1.7% |
139% / 533% |
|
S&P 500 |
-- |
-- |
-- |
1.9% |
16.3% / 23.2% |
Data sources: Yahoo! Finance and YCharts. TTM = trailing 12 months. YTD = year to date. *IIP went public in December 2016, so two years is the longest whole-year comparison period possible. Data to June 14, 2019.
For context, so far in 2019, here are the stock performances of the second-through-fifth-largest Canadian cannabis growers by market cap (behind No. 1 Canopy): Aurora Cannabis: 52.4%, Cronos Group: 48.6%, Tilray: (44.7%), and Aphria: 16.1%.
Canopy Growth: Deep pockets and a big-name partner
Canopy Growth's core operation is growing, processing, and selling medical and recreational cannabis in Canada, though its medical marijuana business is expanding internationally.
Moreover, earlier this year the company became the first of its large Canadian peers to enter the U.S. hemp market, which opened up thanks to enactment of the U.S. Farm Bill on Jan. 1. It's building a large-scale production facility in New York State, where it's licensed to produce products derived from hemp, which notably includes cannabidiol (CBD) products. (CBD is a nonpsychoactive chemical that's been associated with a host of medicinal benefits.)
Two big reasons to favor Canopy are its huge pile of cash -- it had over $3 billion of cash and cash equivalents as of the end of its most recent quarter -- and its partnership with alcoholic beverage giant Constellation Brands (STZ 0.06%). These two advantages are related, as last fall Canopy received $4 billion from the maker of Corona and Modelo beers when it upped its ownership stake in Canopy to 38%. The two partners are working on developing cannabis-infused beverages, which are expected to get the regulatory green light in Canada later this year.
Another reason to like Canopy, founded in 2013, is that its founder Bruce Linton is a co-CEO. Research has shown that founder-led companies tend to outperform in the stock market over the long term.
Image source: Getty Images.
Innovative Industrial Properties: A profitable, dividend payer
Innovative Industrial Properties, based in San Diego and founded in 2016, is a real estate investment trust (REIT) focused solely on properties used for growing and processing cannabis. The fast-growing company currently owns 19 fully leased properties in 11 U.S. states where medical marijuana is legal.
IIP is unique, as profitable pure-play marijuana companies are quite rare, and ones that also pay a dividend are rarer yet. REITs are required to pay out at least 90% of their income in the form of dividends to shareholders.
In the first quarter of 2019, Innovative Industrial Properties continued its torrid profitable growth, with revenue, earnings per share (EPS), and adjusted funds from operations (AFFO) per share soaring 146%, 267%, and 135%, respectively, year over year.
Canopy's earnings on tap for Thursday
IIP's next quarterly report is likely some time away, as the company just reported its first-quarter results last month. Investors in Canopy Growth, however, don't have long to wait for material news, as the cannabis grower is scheduled to report its fourth-quarter and full-year results for fiscal 2019 after the market closes on Thursday, June 20.
Keep expectations in check, as Wall Street expects Canopy's revenue to increase from the third quarter by less than 4% due to some supply chain issues it encountered. You can expect the company to continue to lose money from an operating basis, as it's been making considerable investments to fuel long-term growth.
