This has been a truly game-changing year for the cannabis industry.
The big event, as you're probably aware by now, was the legalization of recreational marijuana in Canada on Oct. 17. Following years of promises to do so from Prime Minister Justin Trudeau, and months of debate in the Senate, the passage of the Cannabis Act in June paved the way for the lifting of nine decades of recreational cannabis prohibition in our neighbor to the north. When the industry is running on all cylinders by the early part of the next decade, it should be generating around $5 billion in added annual sales.
We also witnessed history being made in the United States. During the midterm elections, residents in two new states voted to green-light medical pot, with Vermont and Michigan giving the OK to recreational weed since the year began. The U.S. Food and Drug Administration also approved the very first cannabis-derived medicine in June.
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November's four top marijuana stocks
Despite this, marijuana stocks suffered through their second consecutive rough month in November. Out of 40 of the largest marijuana stocks by market cap that have been publicly traded for at least a month, 26 of them (65% of all pot stocks) fell in November. Of these decliners, 17 dipped by a double-digit percentage.
As for the gainers, 10 of the 14 pot stocks that finished higher did so by a single-digit percentage, with five rising by less than 2.2%.
However, there were a few standouts. Four marijuana stocks bucked the industry weakness and rose in November by a double-digit percentage. Here they are, listed in ascending order.
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Scotts Miracle-Gro: Up 14.7%
Though not a pure-play pot stock, Scotts Miracle-Gro (SMG -0.53%) bucked its recent downtrend, at least for a month, and galloped higher by almost 15%. Without question, the company's fourth-quarter earnings release on Nov. 7 was the key catalyst to its improved performance.
For the quarter and year, things weren't exactly pretty for Scotts. The company's core lawn and garden operations recorded a 2% sales decline in the fourth quarter and over the full year. Meanwhile, Scotts' subsidiary, Hawthorne Gardening, which focuses on hydroponic, lighting, nutrient, and soil solutions for the North American marijuana industry, delivered sales growth of 65% in the fourth quarter, and 20% year over year. But there's a catch. These results include the now-completed acquisition of Sunlight Supply for $450 million. Excluding this buyout, organic sales for Hawthorne fell 27% year over year as marijuana oversupply issues in California wreaked havoc on demand for hydroponic equipment.
So, if things were so terrible for Scotts Miracle-Gro, why was the stock up in November? Simple: The market is always looking forward. Scotts expects to record 10% to 11% sales growth in 2019, with most of this coming from its Hawthorne segment. When combined with an expected $35 million in minimum annual cost synergies, earnings-per-share growth of 10% per year becomes very feasible.
Buying Scotts Miracle-Gro's stock looks to be one of the best ways to dip your toes in the water if you want cannabis exposure with minimal risk.
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Charlotte's Web Holdings: Up 18.9%
A common theme you'll notice from the top-performing pot stocks in November is that earnings results predominantly drove them higher. This was again the case with cannabidiol (CBD)-product maker Charlotte's Web Holdings (CWBHF -0.85%).
Whereas most marijuana stocks are dazzling with rapid sales growth and then losing copious amounts of money on an operating basis, Charlotte's Web is one of a small handful of pot stocks to produce a legitimate profit. In the recently ended quarter, the company recorded $17.7 million in sales, an increase of 57% from the year-ago quarter. Excluding any one-time benefits and costs associated with fair-value adjustments, and then subtracting normal operating expenses, the company generated approximately $4 million in operating income, or $2.5 million including those one-time adjustments.
CBD is the nonpsychoactive cannabinoid that's best known for its perceived medical benefits. It's legal, to some degree, in 46 U.S. states, which has allowed the company to get its products into more than 3,000 retail locations around the country. Sure, it'd help if the federal government softened its stance on marijuana as a Schedule I drug, but the hands-off approach taken toward CBD, which isn't viewed in the same scope as dried cannabis flower, has allowed Charlotte's Web to thrive. While the company isn't cheap on a fundamental basis, the sheer fact that it's already profitable makes it worth keeping a close eye on.
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Innovative Industrial Properties: Up 20.4%
Cannabis-based real estate investment trust (REIT) Innovative Industrial Properties (IIPR 0.19%) also had a fantastic month, with its shares gaining just over 20% in November. Stop me if you've heard this before, but investors can thank the company's stellar third-quarter operating results for the gains.
For the quarter, Innovative Industrial Properties recorded $3.93 million in revenue, up from just $1.56 million in the year-ago quarter, with adjusted funds from operations rising to $0.38 per share, or 81% from the prior-year period. Since REITs are required to pay out most of their earnings in the form of a dividend to shareholders in order to avoid normal corporate income tax rates, the company also boosted its dividend by 40% to $0.35 per quarter. On an extrapolated full-year basis, the company's new yield is once again close to 3%.
The beauty of Innovative Industrial Properties' business model is that its costs are relatively fixed. Since the beginning of the year, it's doubled the number of assets under management from five to 10, with each of these greenhouses and/or processing facilities leased out for a period of 15 to 20 years. Investors are getting very predictable cash flow here, especially with the company having annual rental increases and management fees built into its lease contracts. With a cash-rich balance sheet, look for Innovative Industrial Properties to stay aggressive on the acquisition front moving forward.
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Cronos Group: Up 23.3%
However, the crown for November's best marijuana stock -- and interestingly enough, the only grower on this list -- goes to Cronos Group (CRON 5.00%). Last month, Cronos, which aims to be a top-10 producer by annual output, gained 23.3%.
Unlike the other top performers in November, Cronos Group didn't get a lift from its operating results. Rather, two early-month events lit the flame for its success. First, Cronos caught fire following U.S. midterm election results. With 32 states having now legalized medical cannabis in some capacity, there's growing speculation that the U.S. federal government may reschedule weed, or remove it entirely from the controlled substance list.
The second catalyst, which occurred the day after midterm elections, was the resignation of now-former Attorney General Jeff Sessions. Sessions was a staunch opponent of legalized cannabis, and his removal from the nation's top defense position was viewed by the industry as a step in the direction toward nationwide legalization. The thinking here appears to be that Cronos would be a clear beneficiary if the U.S. federal government changed its tune on pot.
Then again, Cronos still has a lot to prove in the production department. With high costs associated with capacity expansion, brand building, and its international push, it's a pot stock I've suggested investors leave out of their portfolios.
