6 Cannabis Stock Plays Investors Should Know About

Short-term, the stay-at-home trend may have indeed increased demand for cannabis. Longer-term, however, the sector has many supporters, including these investment specialists and contributors to MoneyShow.com who highlight six opportunities in marijuana-related markets. Brit Ryle, The Wealth Advisory Innovative Industrial Properties is a REIT that's focused on the acquisition, ownership, and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. Management reported earnings early in May and beat funds from operations (FFO) estimates while coming in just shy of revenue targets. The company had to give rent deferrals to three smaller clients (of its 27 total tenants) totaling $1.5 million. FFO was up 124% over last year's quarter, and revenues came in 210% higher. Innovative Industrial is still growing and the cannabis industry is actually thriving through Covid lockdowns. We expect to see dividends continue to flow and grow despite the poor economic outlook. The biggest risk we see ahead is the SAFE Banking Act that would allow U.S. banks to lend to cannabis companies and therefore compete with IIPR. But that's not a massive risk in that the banks that do currently lend to cannabis companies charge such high rates that IIPR's deals still look appetizing to companies trying to raise cash and reduce debt. Also, other REITs have banks lending to their customers and still succeed at delivering profits to shareholders. We think Innovative Industrial will be no different. The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide. It recently acquired the top hydroponic nutrient supplier in the U.S. And it now supplies nutrients to a large share of the legal marijuana growers in the country. The company has beat expectations in three of the past four quarters. It's a super-solid investment, and one that we consider recession resistant. Management announced earnings and revenues early in May and blew expectations out of the water with EPS a full $1 ahead. The company also opted to keep its dividend steady this quarter. Hawthorne (the cannabis arm of the company) is still driving solid sales growth, giving revenues a cushion during traditional slow times for the lawn and garden market. We're really pleased with Scotts, and we see it continuing to perform well for years to come. Eddy Elfenbein, Growth Stock Weekly Many states have suggested looking to greater legalization of cannabis as a new source of revenue. Recently these three cannabis stocks turned up in my research as prime candidates for profits from further legalization. Canopy Growth recently announced earnings that could only be described as abysmal: a quarterly loss of C$1.3 billion, or C$3.72 a share. This was in comparison to a loss of C$379 million in the prior year-over-year quarter reported by CGC. Not surprisingly, CGC stock, which had been moving substantially higher, took a major hit. So, why might the cannabis stock, which reported lousy earnings, and has now dropped more than 23%, actually be a buy? As we all know, the current health crisis caused by the coronavirus pandemic and Covid-19 infections has been a hardship on individuals and many companies. And some sectors, like the restaurant, travel, and leisure industries, have taken it on the chin harder than others. But, there is another victim of the virus, not exactly broadly represented in the stock market, we should be aware of. States and municipalities have spent hundreds of millions of dollars to fight the pandemic, provide necessary services, and find new ways-such as new online services-to fulfill governmental responsibilities. In order to refill governmental coffers, states will have to be creative. Raising taxes, which will likely happen, may provide a muted benefit as the unemployment rate has skyrocketed. New Mexico's governor, Michelle Lujan Grisham, directly addressed the possible legalization of recreational cannabis in a recent update on how the state is dealing with Covid-19. Grisham said cannabis tax revenue would mean: ...nearly $100 million of recurring revenue into the budget. I believe we'll see this theme play out over and over in states that have to raise additional revenue. And the necessity of raising tax revenue should prove a boon to a number of cannabis companies. Canopy Growth, as one of the largest cannabis producers in North America, may be a major beneficiary of this trend. The pullback after the CGC's earnings announcement miss may turn out to be a major buying opportunity for investors to benefit from the trend. It should also be noted that a large portion of the loss Canopy sustained in the quarter was due to a restructuring charge. In total, the company took a charge of C$743M in impairments during the quarter related to corporate restructuring. And, as Canopy Growth CEO David Klein shared on the company's earnings call, Canopy Growth's new products are being well received by the market. The company's drink brands are being very well received, and are actually rated as the number one cannabis drink in cities like Ontario. Aurora Cannabis is another cannabis producer that may be giving investors a buy point following a major move upward after earnings. The company reported revenue increases quarter-over-quarter in both its consumer and medical lines, with consumer growing a very respectable 24%. Aurora is an interesting play in that it currently has an interim CEO, Michael Singer. As the company navigates choosing a permanent CEO, there has been some concern that execution may falter. Meanwhile, Aurora announced it would be purchasing U.S.-based CBD company, Reliva, LLC for $40 million. While some analysts fear the combination of finding a new CEO, in conjunction with integrating a new acquisition, may hamper the stock, I think it could spell opportunity. Finally, let's look at an indirect cannabis play based here in the U.S. Akerna is a software provider for the cannabis industry. The company's products are specifically designed to run a cannabis operation's back-office functions. KERN went public last year, just before a decline in cannabis company stocks, and has languished since then. But what I like about Akerna is the fact that it is a picks-and-shovels play. While the cannabis industry is competitive, Akerna is one of the few business software companies focused exclusively on cannabis. And, for those concerned with federal legal issues in the U.S., this is also the better play, as the company does not handle or grow cannabis. Tom Hutchinson, Cabot Dividend Investor Altria Group is the largest U.S. domestic cigarette maker and one of the largest in the world. In addition to cigarettes, Altria also sells E-cigarettes, marijuana, beer, wine, and smokeless products. Altria also owns a 10.2% stake in the world's largest brewer Anheuser-Busch InBev (BUD). In late 2018, Altria purchased a 45% stake in Canadian cannabis company Cronos Group for $1.8 billion. Legal cannabis is a huge growth industry still in its infancy. But the growth is undeniable. The trend toward legalization is clear and could accelerate as states opt for additional tax revenue to compensate for the budget shortfalls from this recession. Altria, with its unparalleled regulatory expertise, deep pockets and marketing should be able to cash in on some of that growth going forward. Is its massive 8% dividend yield safe? I think it is rock solid. The company has a rather high 80% payout ratio, but that is the historical average. And the company has raised the payout every year for the last 50 years. Historically, this has been one of the best and most reliable dividend paying companies on the market because the company generates an obscene amount of free cash flow, money left over after expenses. This is one of those companies that is actually does better during recessions as people tend to smoke more. Meanwhile, that big fat dividend should be safe, and the stock is priced near a five-year low.

6 Cannabis Stock Plays Investors Should Know About

This six-pack from investment specialists includes a REIT and a software provider specializing in the industry.

Columnist Conversation

Pretty Incredible + Hard to Believe

This Weekend on Real Money

Bitcoin vs. Gold: Which Should You Invest In Now?

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.