While marijuana is never not being talked about in the financial news somewhere, it’s become a hot topic again on Wall Street as Canada gets ready to legalize marijuana edibles, beverages, extracts and lotions on October 17. The products should be available for purchase around mid-December.
Now, according to Arcview Market Research, by 2022, the cannabis edibles market could be worth a whopping $4.1 billion in Canada and the United States. So, it’s no surprise that investors are trying to figure out the best way to play this rising trend.
In fact, I was recently asked if investors should buy marijuana stocks now or wait until we see profits. My answer? Wait.
Two of the big pure-plays on marijuana, Canopy Growth Corporation (NYSE:CGC) and Aurora Cannabis Inc. (NYSE:ACB), have seen their growth slow in their most-recent earnings quarters. That’s the opposite of what you want in a company you’re investing in!
To be honest, I don’t see the cannabis side of the marijuana business being the big winner. In fact, I look for it to shrink.
With marijuana legal on a recreational level in Canada and the U.S. getting closer to following suit, a lot of folks can try it now. But smoking marijuana is not “one size fits all.” There’s a lot of varieties and differences in experience when it comes to smoking marijuana, and nothing has been settled on what works best for the marketplace. Clearly, there’s still a lot that needs to be worked out there.
There’s also the blowback from vaping. The CDC announced yesterday that there are now 530 cases of lung injury tied to vaping — a 39% increase from the 380 cases reported just a week ago. They believe that the illness is due to vaping THC, nicotine or a mix between the two. Many patients have wound up in the hospital, and so far, seven have died. There’s also concern over not knowing what the long-term effects of vaping will be. So, this does not bode well for the smoking side of the business.
Instead, I look for the CBD oil market to grow over the long term. However, there are still some issues here, too.
Now, this might come as a surprise, but every weekend I bicycle with a guy who owns a big hemp farm and is in the hemp seed business. While hemp is perfectly legal in all 50 states of the U.S., states like Idaho might see him as being in the pot business.
You see, cannabis seeds are both male and female. The female plants without seeds have higher THC levels, while the male cannabis plants have much less. However, sometimes they change their gender, and if a grower gets too much female in the hemp, they have to basically burn it off, and there goes their crop.
The other problem with CBD oil is the quality is very mixed. I have anesthesiologist clients who swear by it, but they can’t get the quality they want. But once that’s fixed, CBD could be a huge business.
Now, I know what you’re thinking: Louie, does this mean you’re completely against the marijuana space?
Investing in the “Legit” Marijuana Companies
Absolutely not. I just prefer to focus on the companies that have already proven their profitability with track records of solid growth. The “legit” ones, if you will.
For example, in my Accelerated Profits service, I recommended Shopify, Inc. (NYSE:SHOP), a Canadian company, back in January. This company offers a “hassle-free” platform to other retail businesses, giving them space to build their brand and sell their products. It benefited from the legalization of cannabis in Canada, thanks to the surge in online shopping for cannabis.
At the time of my recommendation, the company had posted an average 211.7% earnings surprise in the past four quarters.
The result for my subscribers? We locked in a solid 46% profit in just three months.
SHOP isn’t the only company I’ve recommended in this sector. In Breakthrough Stocks, we currently have Innovative Industrial Properties, Inc. (NYSE:IIPR) on the Breakthrough Stocks Buy List. It’s the only publicly traded cannabis real estate investment trust (REIT). The stock boasts a strong 2.3% dividend yield.
There are two big factors that make IIPR so special. The first is that because it’s a REIT, it’s required to return at least 90% of its taxable income to shareholders in the form dividends. In fact, IIPR will pay its third-quarter dividend of $0.78 on October 15. All shareholders of record on September 30 will receive the dividend.
The second is that it’s not a pure play, either. You see, Innovative Industrial Properties has never grown, processed or sold a single marijuana product. Rather, it leases facilities to medical cannabis providers. Basically, it’s the landlord of the pot growers.
And it’s continued to grow nicely. In the second quarter, property acquisitions helped the REIT achieve triple-digit revenue growth. IIPR acquired 10 properties between April and June, as well as another four properties in July. Year to date, the REIT has acquired 15 properties for about $167.3 million, and it currently owns 26 properties in 12 states.
For the second quarter, revenues surged 159.4% year-over-year to $8.3 million, up from $3.2 million in the same quarter a year ago. Earnings per share soared 76.5% year-over-year to $0.30. The consensus estimate called for earnings of $0.29 per share on $8.34 million in revenue, so IIPR posted a 3.4% earnings surprise and a slight sales miss. Looking forward, though, IIPR’s earnings are forecast to grow 123.8%
Now, this is a volatile stock, and after hitting 52-week high after 52-week high, its shares are now trading well below those levels. However, I see the pullback as an excellent buying opportunity, because as the demand for marijuana and cannabis rises, so will the need for the properties to grow the plant. I’m such a big fan of this stock that it’s one of my Top 5 Stocks on my Breakthrough Stocks Buy List.
However, it’s all about buying at the right price, as you never want to overpay for a stock. So, you can get my buy limit for IIPR here. Also, I recently shared my latest thoughts on IIPR in the Sept. 20 Breakthrough Stocks Weekly Update, so make sure to sign up here for all the details.
Louis Navellier is a renowned growth investor. He is the editor of four investing newsletters: Growth Investor, Breakthrough Stocks, Accelerated Profits and Platinum Growth. His most popular service, Growth Investor, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.