There's little doubt that marijuana has the potential to be a big-time moneymaker for investors over the long run. Based on various Wall Street estimates, worldwide weed sales should grow by 400%, at minimum, between 2018 and 2030.
However, this is also an industry that has a lot of growing up to do. To our north, supply issues are wreaking havoc on the marijuana industry. Meanwhile, in the U.S., high tax rates have made it virtually impossible for legal pot to compete with illicit production. In short, North America is currently a breeding ground for black-market production, which has been thoroughly reflected in depressed cannabis stock share prices.
Yet, these declines could open the door to some intriguing investment opportunities. Here are three cannabis stocks I currently have on my short list that very well could be added to my personal portfolio in 2020.
Planet 13 Holdings
Although it's not on most marijuana stock investors' radars, I view vertically integrated multistate operator (MSO) Planet 13 Holdings (OTC:PLNH.F) as one of the most exciting pot stocks in the entire industry.
One of the biggest factors that differentiates Planet 13 from other MSOs is that this company is focused on the consumer experience. Planet 13 has a 112,000-square-foot SuperStore just west of the Las Vegas Strip in Nevada. When complete, this go-to cannabis destination will feature a consumer-facing processing center, a coffee shop, a pizzeria, and an events center. There isn't a cannabis store in the country that can give consumers the experience that Planet 13 provides, which is a pretty notable differentiating factor.
As someone who's visited the SuperStore firsthand, I'd also point out that the company has done an excellent job of incorporating technology into the mix. There are point-of-sale kiosks at pretty much all stations throughout the store, as well as self-pay kiosks for customers who know what they want. The immersion station in the center of the store is perfect for consumer engagement, and many of the highest-margin products are at the front of the SuperStore or near registers.
What it comes down to is that Planet 13's SuperStore is handling about 9% of Nevada's entire cannabis sales each month, and the major expenses tied to build-out of this location are set to decline next year. In my view, this places Planet 13 in position to push into profitability by perhaps the second half of 2020. With the company also opening up a Santa Ana, California, location spanning 40,000 square feet next year, I'm expecting good things from this stock.
If there's one theme that will continue to be emphasized among cannabis stocks in 2020, it's going to be the push to profitability. And one of the few areas where operating profits have almost become the norm is extraction-service providers. Among them, I favor MediPharm Labs (OTC:MEDIF).
MediPharm Labs, which takes cannabis and hemp biomass and produces resins, distillates, concentrates, and targeted cannabinoids for its clients, only began operations in November 2018 but has already produced back-to-back profitable quarters. What's most impressive is that MediPharm hasn't needed to lean on one-time benefits or fair-value adjustments in order to generate its operating profits. Rather, its fee-based revenue is proving to be more than enough to outpace cost of goods and recurring operating expenses.
What's more, the processing contracts that MediPharm Labs signs are typically for 18 to 36 months in length. In an industry shrouded in question marks, MediPharm provides consistency of cash flow that's going to be extremely hard to duplicate in the cannabis space.
As we enter 2020, we should continue to see MediPharm push toward 500,000 kilos of peak annual processing capacity, as well as build on its existing contracts given that derivative pot products (e.g., vapes, edibles, infused beverages, concentrates, tinctures, and topicals) are hitting dispensary shelves in Canada this week. The perfect storm of profits appears ready to hit extraction-service providers like MediPharm Labs.
Innovative Industrial Properties
Speaking of profits, after nearly getting halved since mid-July, medical marijuana-focused real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR) may find its way into my portfolio in 2020.
Innovative Industrial Properties acquires medical marijuana cultivation and processing facilities, then leases out these assets for an extended period of time (typically 10 to 20 years), thereby reaping the reward of rental income. Additionally, it's able to pass along an annual rental increase to stay ahead of the inflationary curve, and charges a 1.5% property management fee that's tied to the rental rate. In essence, while it primarily grows its net operating income by making acquisitions, it also has a modest organic growth element built in. With a current yield on invested capital of 13.6%, IIP should be able to recoup its investment dollars in just over five years.
The current beauty of the cannabis-REIT business model is that financing has been tough to come by for U.S. pot stocks. In recent months, quite a few have turned to REITs like Innovative Industrial Properties for sale-leaseback agreements, whereby an MSO sells a growing or processing facility to IIP in exchange for cash to bolster its balance sheet. This then allows IIP to lease back the property to its new "tenant" for an extended period of time.
As the sprinkles on this sundae, Innovative Industrial Properties has announced an increase to its dividend of 28% from the sequential third quarter to $1 per share. This makes Innovative Industrial's 5.3% yield the high-water mark among pot stocks.