After a slew of disappointing fourth-quarter earnings reports from Canada's largest cannabis producers, it might seem like this industry has nothing to offer investors who are averse to taking huge risks. You're nearly right, but there are at least two stocks in this space that appeal to more conservative investors who don't buy companies while they're losing money.
The latest results from Charlotte's Web Holdings (CWBHF 0.27%) suggest it's the first cannabis company to establish a recognized brand with real pricing power.
There aren't many cannabis companies making money right now, and there's only one that pays you to hold its shares. Innovative Industrial Properties (IIPR 1.60%) is a canna-business-focused real estate investment trust that pays regular dividends.
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Both of these companies produce profits now, and there are good reasons to suspect they'll steadily earn a lot more.
Charlotte's Web Holdings: Early lead
This company's name is derived from a cannabis strain that its founders created for a girl with uncontrollable seizures named Charlotte. After 60 Minutes showed America how well it worked for young Charlotte, requests for the proprietary strain started pouring in. Right now, Charlotte's Web is the only nationally recognized brand of cannabis product, and the pricing power it's displaying is just incredible.
The Charlotte's Web strain hardly produces any THC, which is marijuana's main psychoactive cannabinoid. Instead, it produces heaps of CBD and small quantities of various terpenes and other cannabinoids that all work together to heighten CBD's therapeutic properties. You might not believe in the entourage effect, Charlotte's customers and most cannabis consumers do. Charlotte's Web doesn't sell its seeds, which means patients can't get the exact same thing from anyone else.
Exclusivity gives Charlotte's Web pricing power, an exceedingly rare trait in the cannabis industry. It's easy to find purified CBD isolate for less than $10 per gram, but customers don't seem to mind paying around $100 for every gram of CBD oils and capsules from Charlotte's Web. While most of the big cannabis producers reported significant losses, Charlotte's operations squeezed out a $15.0 million profit with just $69.5 million in total sales last year.
Since Charlotte's Web doesn't market anything considered illegal by the federal government anymore, its products were available in 3,680 retail locations at the end of 2018. The company's listing on the Canadian Securities Exchange doesn't make it easy to raise equity, but it costs a lot less to maintain and Charlotte's shouldn't need to raise equity again.
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Innovative Industrial Properties: Carving out a niche
Innovative Industrial Properties, or IIP, is a real estate investment trust (REIT), which means it can avoid paying taxes by distributing nearly all of its profits to shareholders in the form of dividends. This REIT recently declared its eighth consecutive dividend, which has risen 80% since the first quarter of 2018.
IIP provides financing to state-licensed canna-businesses in the U.S. that want to build new facilities or borrow against facilities they already own to build more. In the fourth quarter, rental revenue more than doubled from the prior-year period and it will probably keep growing at a rapid pace in 2019.
In six short months, the company entered four new long-term leases and as of March 13, 2019, owned 13 properties. IIP's employs triple-net leases that leave tenants responsible for all the variable costs that come with building ownership. These leases also include annual rent increases, and property management fees that allow the company to boast about a 15.1% yield on invested capital.
In the fourth quarter, adjusted funds from operations (FFO) rose 344% compared to the previous-year period, to $0.38 per share. That's significantly less than the $0.45-per-share dividend payout, but earnings are rising fast enough that it probably won't be an issue.
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Worth buying now?
Unfortunately, IIP's stock price has grown even faster than its dividend payout, and now the stock offers a meager 2.2% yield. As long as IIP's tenants can keep paying rent, though, the payout could grow fast enough to make this stock worth the risk.
Charlotte's Web stock has been trading at 12.3 times trailing sales. That's three to four times the price-to-sales ratios of most consumer goods companies, but most consumer goods companies didn't report a 74% revenue gain last year. With the only brand highly associated with healing properties for years, there's a good chance the company can do it again this year.
Charlotte's Web and its competitors are specifically prohibited from suggesting their products have any health benefits, but the 60 Minutes episode with Charlotte's story already covered that base. Without a health angle, marketing's going be a bit tricky for competitors trying to build a new brand.
Thanks to the latest farm bill, placement of CBD products in mainstream retail outlets is raising awareness, and demand for the leading brand has a lot of room to grow. Despite its price, Charlotte's Web is well worth the risk.
