The North American legal marijuana industry is transforming before our eyes. Canada, after years of talk, appears to be on the verge of becoming the first developed country in the world to legalize adult-use cannabis. Following passage of the Cannabis Act in the Senate and House of Commons, the bill has made its way to royal assent. By Oct. 17, 2018, adults should be able to legally purchase cannabis in Canada.
Within the U.S., despite the federal government holding firm on its Schedule I classification of the drug -- meaning it's illegal, prone to abuse, and has no recognized medical benefits -- 29 states have given the green light to medical marijuana, and nine have allowed adults to legally use pot.
These pot stocks are looking particularly attractive
Essentially, North America is a breeding ground for cannabis growth, and the data show it. In North America, legal pot sales grew by 33% to $9.7 billion in 2017, according to ArcView Market Research. By its estimates, legal sales could hit nearly $25 billion by 2021, and run to $47 billion in a decade. This is the type of growth that has investors salivating over pot stocks, and is why marijuana stock valuations have launched into the stratosphere.
Make no mistake about it, there is no shortage of marijuana stocks to choose from. But most are downright bad businesses or expensive stocks. However, there are three pot stocks that stand out as being particularly attractive, even following their moves higher. If you're looking to dip your toes in the water, I suggest considering one, or all, of these marijuana stocks for your portfolio.
If I had to choose one marijuana stock that stands out above all others as the most intriguing and attractive right now, I would choose OrganiGram Holdings (NASDAQ:OGI).
OrganiGram is unique in a number of ways. For starters, it's decided to expand its production entirely in one location: its Moncton facility in New Brunswick. While its competitors tend to have their grow facilities scattered within provinces, or even across Canada, OrganiGram's decision to centralize its grow site should help it control costs better than any of its peers.
In terms of cannabis production per square foot, OrganiGram is also pretty hard to top. The Moncton facility, when complete in April 2020, will span 480,000 square feet, but should yield in the neighborhood of 113,000 kilograms of cannabis per year. By comparison, and for added context, Hydropothecary Corp. should have an estimated 1.3 million square feet of grow space, but it's expected to produce "only" 108,000 kilograms of cannabis at full capacity. That's how impressive OrganiGram's yield is relative to its competitors.
OrganiGram has also placed a lot of emphasis on cannabis oil production, as opposed to relying solely on dried cannabis. Though oils target a niche group of consumers, it's a product line that won't face the same type of pricing or commoditization pressures as dried cannabis. In essence, it should generate considerably higher margins.
OrganiGram's forward P/E of 30, given its strong expected sales growth, makes it appear cheap in my eyes, and worthy of consideration for your portfolio. But given the desire of larger growers to boost their capacity and claim as much market share as possible, OrganiGram also looks like a good bet to be acquired within the next year.
Innovative Industrial Properties
If you want exposure to the fast-paced marijuana industry without the ups and downs that could come with harvesting the plant, small-cap real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR) could be a winner.
A REIT is a company whose purpose is to buy land or buildings, then lease those assets over long periods of time. Ultimately, these assets are (usually) sold for a profit many, many years down the road. Most REITs tend to have an industry or sector of focus. In the case of Innovative Industrial Properties, it purchases medical cannabis greenhouses in the U.S., and leases them out for a period of 15 years, with the option of two additional five-year extensions.
Right now, Innovative Industrial Properties owns a half-dozen total properties in five states and, as of May 9, was reviewing around $100 million worth of properties for possible acquisition. The company ended the first quarter with $42.1 million in cash on hand, as well as $48.9 million in short-term investments, giving it adequate capital to add greenhouses as it sees fit.
The beauty of this business model is that it generates predictable cash flow. Since the average lease of its existing properties was 14.4 years as of the end of Q1 2018, and it runs a relatively fixed-cost model, the company doesn't have to do much to stay profitable other than keep its eyes out for attractively priced medical marijuana properties.
Also, as a REIT, Innovative Industrial Properties receives favorable tax status. In exchange for returning most of its operating income to shareholders in the form of a dividend, the company avoids normal corporate income tax rates. Sporting a nearly 3% dividend yield -- that's right, a marijuana stock with a dividend -- and a forward P/E of just 19, this unique cannabis stock offers a lot of long-term promise.
Another marijuana stock worth a closer look is the Ontario-based CannTrust Holdings (NYSE:CTST). Among traditional pot growers, none is cheaper on the basis of forward earnings than CannTrust, with a forward P/E of just 25.
Like OrganiGram, what makes CannTrust special is the company's focus on alternatives to dried cannabis. At the moment -- at least of the publicly traded cannabis stocks with a market cap of more than $200 million -- there's no grower generating more of its revenue from oils and extracts than CannTrust. In its most recent quarter, more than half of its sales were derived from oils, which means its margins are likely to be considerably higher than its peers.
CannTrust has also placed a lot of emphasis on partnerships and innovation to drive its growth. The company recently introduced vegan hard-shell oil capsules, and formed a partnership with Grey Wolf Animal Health to explore opportunities to use cannabis or cannabis oils for pets. Americans spent $69.5 billion on their pets in 2017 -- $17.1 billion on vet care and $15.1 billion on supplies and over-the-counter medicine -- according to the American Pet Products Association.
Even though CannTrust's production capacity will likely be much smaller than a number of its peers -- peak capacity might come in around 1 million square feet, assuming the company decides to squeeze every ounce of production possible out of its Niagara greenhouse facility -- it'll be among the most efficient with the revenue it does generate.
Already profitable, and focused on the higher-margin medical side of the market, CannTrust is a marijuana stock that could be worth adding to your portfolio.