A year ago, cannabis was the hottest investment on the planet – and it's not hard to understand why. Although estimates vary wildly on Wall Street, the prevailing consensus is that worldwide marijuana revenue will grow fivefold to 18-fold between 2018 and 2030. That's led to some (pardon the pun) high hopes for pot stocks.
However, the past year hasn't delivered the green that was widely expected. Supply problems in Canada and exorbitant tax rates in select U.S. states have worked to steer consumers to the black market throughout North America. As a result, sales projections for cannabis stocks have been plummeting across the board.
For example, back in mid-April, Wall Street had cannabis-growing giants Canopy Growth, Aurora Cannabis, and Aphria pegged for $595 million, $643 million, and $628 million in respective full-year fiscal 2020 sales. Today, those same companies now have 2020 revenue forecasts from Wall Street of $412 million, $395 million, and $447 million, respectively, in fiscal 2020. While the magnitude of consensus sales decline may differ from company to company, the general constant throughout the marijuana industry is that sales estimates are falling.
That is, unless you own one of the following three pot stocks, where 2020 sales forecasts are on the rise.
Innovative Industrial Properties
One marijuana stock that's seen its 2020 sales estimates rise pretty consistently throughout the year is cannabis real estate investment trust (REIT), Innovative Industrial Properties (IIPR 4.98%). As recently as June, the company's 2020 forecast called for a little over $60 million, whereas today the consensus is $80 million.
As a REIT, Innovative Industrial acquires land and facilities for growing and processing medical marijuana, then leases these assets out for long periods of time, thereby reaping the rewards of rental income. Given that IIP began the year with fewer than a dozen assets, but now has 41 properties in 13 states, it's only logical that its sales forecasts should be rising.
The beauty of IIP is the company's predictable business model. Although shareholders are at risk of being diluted by common stock issuances, which are normal for a REIT that's trying to raise cash for more acquisitions, the contracts Innovative Industrial has with its tenants creates a long runway of predictable cash flow. The company's weighted-average remaining lease is 15.5 years, and its yield on $410.2 million in invested capital is 13.8%. This should result in a complete payback of its invested capital in just over five years.
In short, the more properties IIP buys, the higher its revenue potential grows. Just keep in mind that its share price appreciation could be held in check by its common stock issuances.
Ancillary pot stock KushCo Holdings (KSHB) has also seen its 2020 sales forecast rise, albeit at a more modest pace than IIP. Back in April, Wall Street was looking for KushCo to report about $205 million in sales next year. Today, the consensus is closer to $211 million, and it could head even higher with the company forecasting $230 million to $250 million in sales next year in its recently released fourth-quarter operating results.
Working in KushCo's favor is the fact that it has its fingers in numerous facets of the global cannabis industry. It supplies vaporizers and accessories, which is noteworthy given that vapes are expected to be the leading sales generator among derivative pot products. KushCo also has a burgeoning packaging and branding solutions business that's designed to help growers remain compliant with federal, state, and local laws, as well as stand out in an increasingly competitive field. The company also provides hydrocarbon gases that are used in the production of cannabis oils, and recently announced a new venture into hemp trading, which it opines will produce at least $25 million in sales in 2020.
The downsides to be wary of with KushCo are twofold. One, the company is still losing money. Even though margins generally improved throughout the year, a gross margin of 20% in the fourth quarter is still 10 percentage points lower than where management envisions it being.
The second concern here would be expected softness in sales from vaporizers in the first-half of 2020. This weakness is tied to health concerns related to vaping. The Centers for Disease Control and Prevention noted on Nov. 5 that 2,051 cases of confirmed or probable mystery lung illnesses, including 39 deaths, have come as a result of vaping. This scare runs the risks of adversely impacting KushCo's leading source of revenue. However, the company anticipates the impact will be temporary, with vaporizer sales picking up in the second half of the year.
Finally, even though management would prefer it not be lumped in as a "marijuana stock," cannabinoid-based drug developer GW Pharmaceuticals (GWPH) has seen its sales forecasts for 2020 climb pretty substantially. In April, Wall Street was looking for $430 million in next-year sales. Today, this is estimate is up to $556 million.
The big reason for this substantive jump in the company's outlook has to do with the strong launch of Epidiolex, a cannabidiol-based oral drug designed to reduce seizure frequency in patients with two rare forms of childhood-onset epilepsy. GW Pharmaceuticals' lead drug, which launched in Nov. 2018, generated net sales of $86.1 million in the third quarter, and $188 million through the first nine months of 2019.
Whereas other synthetic cannabinoid therapies have flopped after their launch, GW Pharmaceuticals has done a superb job of gaining adequate insurance coverage for Epidiolex, as well as educating physicians about this new treatment option. More than 3,000 physicians have prescribed Epidiolex since the drug was launched. The expectation now is that Epidiolex will be launched throughout Europe next year, further bolstering its sales potential.
The only major concern here is that GW Pharmaceuticals still isn't making money, but that's expected to change next year. Nevertheless, sporting a market cap of $3.4 billion, GW Pharma will need a lot to continue going right to support this somewhat aggressive valuation.