In case you missed it, last week was the earnings free-for-all in the cannabis industry that Wall Street and investors had patiently waited for. Unfortunately, things did not go as planned.
Although it was a well-known fact that Canadian pot stocks have been hit hard by supply issues, and U.S. cannabis stocks have struggled with high tax rates and a persistent black market, no one was prepared for just how poor marijuana earnings reports were in the most recent quarter. Each of the big four brutally underwhelmed Wall Street with their latest operating results, and investors once again took it upon themselves to pummel marijuana stocks even further. Since the end of the first quarter, the Horizons Marijuana Life Sciences ETF, the first cannabis-focused exchange-traded fund, has lost 57% of its value.
And yet, three cannabis stocks managed to buck this trend and actually topped Wall Street's earnings expectations in their most recent quarter.
Innovative Industrial Properties
Maybe it's no surprise that Innovative Industrial Properties (IIPR -0.86%), one of the top-performing cannabis stocks this year and the only pure-play pot stock that pays a dividend, blew past Wall Street's operating expectations in the third quarter. The $0.55 per share the company recorded in net income wound up being $0.08 per share ahead of the consensus estimate.
Innovative Industrial Properties' not-so-secret to success is its setup as a cannabis-focused real estate investment trust (REIT). REITs receive preferential tax treatment in return for paying out most of their earnings as a dividend to shareholders. The company ended the latest quarter with 42 properties in its portfolio spanning 13 states. This means that as it adds more assets to its portfolio, its rental income and cash flow should rise accordingly.
Even more important, Innovative Industrial Properties is generating predictable cash flow from its assets. The weighted-average remaining lease on these 42 properties is 15.5 years, and the company is yielding 13.6%, on average, per lease agreement. This should result in a complete payback of its $431.2 million in invested capital in a little over five years.
Although investors in IIP will have to contend with the occasional share issuance to raise capital, the company appears well-positioned to succeed as the U.S. pot industry matures and expands.
Marijuana and hemp extraction-services company Valens GroWorks (VLNS) also dazzled in its latest quarterly operating report, which was released five weeks ago. Valens wound up recording 16.5 million Canadian dollars in sales, an 87% improvement from the sequential second quarter, and net income of CA$0.05 per share. That's a full CA$0.03 per share more than Wall Street had been counting on.
What's made Valens GroWorks' ascent so impressive is that it only recently began operations as an extraction company. This rapid rise in sales from virtually nothing demonstrates just how important these marijuana and hemp middlemen like Valens will be in providing resins, distillates, concentrates, targeted cannabinoids, and white-label manufacturing and packaging services. After all, derivative pot products are set to launch in Canada next month, and they sport significantly juicier margins than dried cannabis flower. This makes extracts a must for any pot stock.
Valens has also had little trouble securing deals for its services. It's already signed a two-year agreement with HEXO to provide extraction services for 80,000 total kilos of cannabis and hemp biomass, and will be doing the same for Tilray at a rate of 60,000 kilos a year. These fee-based contracts, similar to IIP above with its rental agreements, provide predictable revenue and cash flow on a quarterly basis.
With Valens angling to boost its processing capacity to 1 million kilos a year, look for the company's sales and profits to soar in the quarters to come.
Even though management doesn't like when its company is referred to as a "marijuana stock," cannabinoid-focused drugmaker GW Pharmaceuticals (GWPH) also trounced Wall Street's consensus estimate. With $91 million in sales, which was a good $5 million more than expected, and a diluted loss of $0.04 per share, GW Pharmaceuticals galloped well past the $0.85-per-share loss that analysts had been looking for.
The catalyst to GW Pharmaceuticals' strong quarter is also no secret: Epidiolex. Epidiolex is a cannabidiol (CBD)-based oral solution that was approved by the U.S. Food and Drug Administration in June 2018 to treat two rare forms of childhood-onset epilepsy. Following its November 2018 launch, GW Pharmaceuticals has done an excellent job of securing insurance covering for its novel therapy, and has seen more than 15,000 patients receive Epidiolex since the drug was launched. As a result, GW Pharmaceuticals is likely to push toward recurring profitability a lot sooner than anyone (including myself) expected.
The company also has an impressive cannabinoid-based pipeline that it intends to lean on. GW Pharmaceuticals is attempting to expand Epidiolex's label to a number of new indications, including tuberous sclerosis complex, and is testing Sativex, a therapy approved throughout much of Europe, in the U.S. as a treatment for spasticity associated with multiple sclerosis. GW is working with a mountain of sales momentum from Epidiolex, and it's very possible that these earnings "beats" could continue.