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2 Marijuana Stocks That Can Soar if Prices Keep Falling

By Cory Renauer – Nov 10, 2018 at 7:22AM

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Here are a couple businesses still poised to thrive if cannabis producers keep chasing each other to the bottom.

Beginning pot stock investors need to remember that it's called weed for a reason. It grows fast enough that consumers experiencing shortages in Canada today could next year find themselves knee deep in cheap cannabis products all jostling for market share.

Plenty of North American marijuana stocks could continue sliding along with average prices of their products, but KushCo Holdings Inc. (KSHB) and Innovative Industrial Properties Inc. (IIPR -5.19%) are poised to surge in a consumer-friendly environment. Here's what you need to know about the interesting positions they'll play in a legal marijuana market expected to reach $146 billion by 2025.

Dollar sign casting a shadow on marijuana leaves.

Image source: Getty Images.

KushCo Holdings Inc.: More than 1 billion served

KushCo Holdings is the parent company of Kush Bottles, the largest distributor of packaging supplies in the U.S. Since its inception in 2010, the company has sold more than 1 billion units and services more than 5,000 cannabis operations around the globe.

After hitting a peak of around $2,100 per pound in June of 2016, wholesale pot prices in the U.S. fell to an average of just $1,060 per pound in November. Earlier this year, some growers in Oregon were auctioning off their ready-to-sell flower for just $100 per pound. 

Oregon's oversupplied market is hopefully an extreme example, but KushCo shareholders stand to benefit even if it becomes the new normal. All that marijuana needs to go into containers, and unlike Oregon's cannabis producers, KushCo doesn't have much trouble shipping its products across borders.

Earlier this year, KushCo began distributing purified solvents used to extract cannabinoids from the marijuana plant. In Canada, consumer options are limited to dry flower and cannabis oil, but in the U.S., a wide variety of extracts now comprises a majority of legal marijuana sales. Extracts require less packaging, and KushCo was probably smart to increase its footprint along this step of the supply chain.

For the fiscal year ended August, KushCo Holdings expects to report $51 million in total revenue, which is 171% more than the previous year. At recent prices, the company boasts a $469 million market cap that could swell if increased legalization in the U.S. and abroad keeps pushing up demand for packaging and solvents.

Marijuana in a mason jar with a lot of cash.

Image source: Getty Images.

Innovative Industrial Properties Inc.: The cannabis REIT

As long as marijuana remains illegal under federal law, borrowing from traditional sources to build facilities just isn't an option. This real estate investment trust (REIT) is essentially a U.S. marijuana industry landlord. Oversupply can make it hard for producers to turn a profit, but times need to get awful tough before businesses stop paying their rent.

Some REITs manage their own investments, but Innovative Industrial Properties is taking a hands-off approach by signing long-term triple-net leases with cannabuisinesses across the country. With regular rent increases written into 15-year leases that leave renters responsible for variable expenses, this company's cash flows will be some of the most predictable in the business.

In order to avoid taxes, REITs are required to distribute nearly all their profits to investors in the form of dividends. At recent prices, Innovative Industrial Properties offers a 3.2% yield, which could grow rapidly in the years ahead. During the third quarter, adjusted funds from operations came in at $0.38 per share, which should be enough to cover a quarterly dividend payment the company recently hiked 40% to $0.35 per share.

At the moment, Innovative Industrial Properties owns just 10 properties and hadn't started collecting rent on two of them at the end of the third quarter. If the company continues expanding at such a rapid pace, look for a lot more big payout bumps ahead.

Stacked coins that sprout marijuana plants.

Image source: Getty Images.

What's a dividend in the hand worth?

While KushCo Holdings is well positioned to become an indispensable cog in the cannabis supply chain, it isn't making any money at the moment. At least, we can only assume that's the case, because when the company reported preliminary revenue figures for the year ended August, nobody mentioned a profit. 

It's been more than eight weeks since KushCo gave us preliminary revenue figures, and although the company has had enough time to form an "advisory board to guide strategic growth initiatives," we still don't have a financial report for the year ended August 2018.

Since KushCo Holdings trades over the counter, we don't know when we'll find out how much money the company's making -- or losing. If you find that unacceptable but still want a stock that can deliver if pot prices plummet, Innovative Industrial Properties is right up your alley. The REIT might not have the same growth potential, but it's far less likely to deliver unwelcome surprises while those dividend payments roll in one quarter after another.

Cory Renauer has no position in any of the stocks mentioned. The Motley Fool recommends Innovative Industrial Properties and KushCo Holdings. The Motley Fool has a disclosure policy.

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