In case you haven't been paying attention, the marijuana industry has been the buzz on Wall Street for more than two years, and for very good reason. With Canada lifting the curtain on nine decades of recreational prohibition, and more than 40 countries worldwide waving the green flag on medical cannabis, the red carpet is being rolled out for the legal cannabis movement. The massive marijuana industry that's existed in the black market for decades is steadily moving into the legal landscape, providing an opportunity for investors to make bank.
Of course, it could be argued that the boat has sailed on the largest pot stocks, many of which have delivered quadruple-digit percentage gains over the past three-plus years. That leaves small-cap pot stocks with a market cap of $250 million to $2 billion as potentially the most intriguing long-term plays for marijuana investors.
After screening more than four dozen pot stocks, most of which are small caps, the following five look to deliver the strongest per-share profits in 2020, according to Wall Street's current consensus estimate.
Innovative Industrial Properties
When it comes to profitable pot stocks, none delivers the green quite like cannabis real estate investment trust Innovative Industrial Properties (IIPR 3.98%). This is a company that acquires land for cultivation and processing facilities, then leases it out for extended periods of time. In addition, Innovative Industrial tacks on 3.25% annual rental increases, as well as a 1.5% management fee, which helps add some organic growth icing to its cake.
Currently, IIP, as the company is also known, has 19 properties in its portfolio across 11 states, including six that were purchased in California just since the beginning of the year. Because this is a relatively low-cost model, it doesn't need much in the way of rental revenue to generate substantial profits. For instance, adjusted funds from operations, which is the measure responsible for determining IIP's quarterly dividend, grew by 275% to $0.54 per diluted share in the first quarter from the prior-year period despite only $6.6 million in rental revenue in Q1. This is how Innovative Industrial has been able to triple its payout in just two years.
Next year, Wall Street's lone estimate is for $3.21 per share in earnings, making it the only pure-play pot stock on track for more than $1 in EPS. Then again, its low share count does play a role in its relatively high EPS potential.
Vertically integrated dispensary operator Trulieve Cannabis (TCNNF 5.22%) is also expected to be quite profitable in 2020, based on Wall Street's consensus, with $0.82 per share in full-year earnings expected. Taking into account Trulieve's almost 110 million shares, this works out to an expected profit of $90 million.
Although most U.S.-focused dispensary operators have pushed into multiple states, and Trulieve is no exception given its recent acquisitions in Massachusetts and California, this is a company that's ingrained in the Florida market. Trulieve somewhat recently opened its 27th dispensary in the Sunshine State and hopes to continue reaping the rewards of a generally older population that could benefit from medical cannabis products. It's also worth mentioning that Florida removed a ban on smokable cannabis two months ago, which may help improve foot traffic to statewide dispensaries and further boost sales.
If Trulieve Cannabis' 2018 is any indication of where it's headed, it should have little trouble generating $90 million in profit next year. In 2018, the company generated a $38 million operating profit on $102 million in sales, and this was without the help of fair-value adjustments on biological assets.
Charlotte's Web Holdings
Despite a nearly $1.6 billion market cap, hemp oil and hemp-derived cannabidiol (CBD) products manufacturer and distributor Charlotte's Web Holdings (CWBHF 2.10%) is still a small cap...and a very profitable one, at that. After producing $0.12 per share in earnings in 2018, Wall Street is looking for $0.75 in EPS by 2020, all while more than doubling sales in 2019, and then again in 2020.
Toward the end of 2018, Charlotte's Web had its hemp and hemp-derived CBD products in nearly 3,700 retail doors. CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits. But according to preliminary first-quarter operating guidance released two weeks ago, it now has its products in more than 6,000 retail locations.
If you're looking for an explanation as to why its retail door count surged, look no further than December's signing of the Farm Bill into law in the United States. The Farm Bill legalized industrial hemp production and hemp-processed derivatives, meaning Charlotte's Web, which already had the highest hemp-derived CBD market share in the country, literally and metaphorically had new doors open up with a signature from President Donald Trump.
As one added note, half the company's sales are derived from its e-commerce segment, which is another reason why operating margins at Charlotte's Web leave most pot stocks eating its dust.
Village Farms International
The smallest pure-play pot stock on this list by market cap is jack-of-all-trades Village Farms International (VFF 2.86%), at $658 million market cap. Despite being a tiny tot, Wall Street is looking for the company to deliver $0.58 in EPS for the full year in 2020, or nearly $28 million in net income.
I say "jack of all trades," because Village Farms is dabbling in a bit of everything. To begin with, it has a joint venture with Emerald Health Therapeutics, known as Pure Sunfarms, that expects to produce 150,000 kilos of cannabis across 2.1 million square feet of cultivation space in British Columbia. Emerald Health and the Pure Sunfarms joint venture still have the option of acquiring 2.6 million additional square feet of greenhouses from Village Farms, which, if the above yields are accurate, would put the joint venture on track for well over 300,000 kilos of annual output.
Secondly, it has vegetable-growing greenhouses galore that provide in the neighborhood of $150 million in sales per year. Though this is a generally low-margin business, it often generates reasonable cash flow.
And more recently, following the passage of a hemp bill in Texas' Senate, Village Farms has been looking to aggressively grow hemp. Hemp, while having numerous industrial uses, is often rich in CBD, making it a low-cost source for extraction. Village Farms' avenues to profitability are expanding.
Finally, clocking in with a $1.2 billion market cap, Atlantic-based grower OrganiGram Holdings (OGI 7.46%) should be making bank by 2020. Wall Street has the company pegged for $0.25 in full-year EPS, which would work out to net income of more than $31 million.
OrganiGram's secret sauce continues to be its location and production efficiency. In terms of location, no other major grower is headquartered on Canada's East Coast, albeit major growers do have small facilities spread throughout the region. Based in New Brunswick, the company possesses natural geographic advantages in the lesser-populated, but generally higher cannabis-use-rate provinces of New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador.
OrganiGram is also almost unsurpassed in growing efficiency. Management continues to stick by peak yield estimates of 113,000 kilos across roughly 490,000 square feet of growing space. That's 231 grams per square foot, or more than double the industry average. OrganiGram's use of three tiers of growing space within its grow rooms has allowed it to produce with the big boys, all while maintaining just a modestly sized grow farm in Moncton.