This Marijuana Stock Just Made History (No, It's Not Canopy Growth)

An off-the-radar company in cannabis took a huge step toward mainstream acceptance.

Dan Caplinger
Dan Caplinger
Feb 15, 2019 at 9:14AM
Health Care

Investors have been flocking into marijuana stocks, and the returns that cannabis companies have generated for their shareholders have been impressive. Yet many investors are still shying away from companies in the marijuana industry because of the legal and logistical challenges involved with the business. In addition, the fact that so many of the most popular stocks in the cannabis industry are based in Canada has made it more of a challenge for U.S. investors to feel comfortable investing in the sector.

One marijuana stock just took a major step toward mainstream acceptance. Innovative Industrial Properties (NYSE:IIPR) doesn't grow cannabis, but it helps marijuana producers by helping them find the real estate and facilities that they need in order to comply with the many regulations governing U.S. cannabis growers. Moreover, the cannabis real estate investment trust (REIT) just got news that will make it a pioneer in the business -- even putting it ahead of Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB), and the other high-profile marijuana stocks that made news with their earnings earlier this week.

Check out the latest Innovative Industrial Properties earnings call transcript.

Pile of marijuana leaves with one centered and highlighted.

Image source: Getty Images.

The top marijuana REIT joins the index fund world

The news that Innovative Industrial Properties got late Thursday will potentially open the doors to millions of investors owning a piece of the real estate investment trust. The reason: S&P Dow Jones Indices said that Innovative Industrial will join the S&P SmallCap 600 index effective as of Feb. 21.

The move comes as part of a regular set of replacements based on recent corporate moves. Insurance specialist Aspen Insurance Holdings was a member of the S&P MidCap 400 index, but it's getting bought out by Apollo Global Management, opening up a spot in the mid-cap stock benchmark. Healthcare services provider Amedisys is currently a member of the small-cap index, but it will get promoted to the S&P MidCap 400 as a result of the Apollo-Aspen merger. That opens up Amedisys' spot in the SmallCap 600, and that's where Innovative Industrial will step in.

The news release from S&P Dow Jones Indices downplayed the event's significance. The description of Innovative Industrial doesn't even mention cannabis, merely characterizing the company as a "real estate investment trust [that] focuses on the acquisition, ownership, and management of specialized industrial properties."

Why Innovative Industrial did what Canopy and Aurora haven't

At first glance, it might seem strange that Innovative Industrial would get invited to be part of an S&P index when much larger players in the cannabis business haven't. Innovative Industrial has a market cap of just $600 million, while Canopy and Aurora both have multibillion-dollar market capitalizations. Indeed, Canopy's $15 billion market cap is large enough to make it comparable to many stocks in the premier S&P 500 index.

The main reason why Innovative Industrial has gotten in ahead of so many other cannabis companies is that it's based in San Diego. Canadian stocks aren't automatically disqualified from being considered for various S&P indexes, as the fact that Canopy, Aurora, and others have listed their shares on major U.S. stock exchanges rather than using American depositary receipts was enough to avoid certain disqualification language that the index manager puts on candidate stocks. However, only a handful of the current members of the S&P 500 have headquarters outside the U.S. -- and the vast majority of those are companies that have historical U.S. roots but that moved overseas as part of transactions intended to take advantage of favorable tax laws in international jurisdictions. Canopy and Aurora haven't been able to overcome that implicit obstacle yet, instead remaining ensconced in the much less followed S&P/TSX indexes that track Canadian stocks.

One small step for a stock -- one giant leap for marijuana

Getting admitted to the S&P SmallCap 600 is a huge move for Innovative Industrial that will dramatically increase its visibility among investors. Millions of people use index mutual funds and exchange-traded funds to invest, and even though the small-cap index isn't as popular as the S&P 500, it still attracts plenty of attention. For instance, the iShares Core S&P Small-Cap ETF currently has more than $40 billion in assets under management -- and its investors will automatically own a piece of Innovative Industrial once the ETF matches up to the index change later this month.

More importantly, getting to be part of a well-recognized index will make Innovative Industrial a pioneer in the cannabis industry. Mainstream investors will look more closely at the REIT's business model and how it profits from marijuana -- and they'll realize that there are many opportunities for companies to profit from cannabis other than growing it themselves. The move will also give Innovative Industrial greater access to capital that in time could make it the first marijuana stock to join the S&P 500. With so much growth potential, that's a powerful combination that should make investors keep an eye on the marijuana REIT.