KushCo Holdings (KSHB) and Innovative Industrial Properties (IIPR 0.06%) ranked as two of the best-performing marijuana stocks last month. The performance marked the beginning of a rebound for KushCo after its shares plunged 69% last year. IIP's jump in January, though, reflected continued strength for the stock after soaring 67% in 2019.
Which is the best stock to buy now? Here's what you need to know about KushCo and Innovative Industrial Properties.
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The case for KushCo Holdings
KushCo Holdings used to be known as KushCo Bottles, a name that reflected the company's roots in providing packaging solutions for the cannabis industry. The company still sells packaging solutions, but it's also a major player in selling vaping hardware and technology and other niches in the cannabis industry.
The company's revenue has skyrocketed by an impressive compound annual growth rate (CAGR) of 133% since 2016. While KushCo's rate of growth has slowed down, it still posted 38% year-over-year sales growth in its fiscal 2019 fourth quarter in the midst of a tough market for vape products due to the vaping healthcare scare.
Now, though, the worries about vaping appear to be waning somewhat. KushCo expects stronger growth in 2020 as the U.S. cannabis market heats up. And it should get much hotter, with projections that the market will quadruple in size by 2026 to more than $80 billion.
That growth doesn't include the prospects for CBD products. Estimates vary for just how big the U.S. CBD market might become, but CBD presents another big opportunity for KushCo -- especially with its business that provides hydrocarbons and solvents for extracting CBD from cannabis.
Canada's "Cannabis 2.0" market also is a growth opportunity for KushCo. Demand for cannabis extraction should increase as companies market beverages, foods, and other products infused with CBD or THC.
The main knock against KushCo is that it remains unprofitable. However, the company has cut costs and thinks that it will achieve positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the second half of fiscal year 2020, which ends on Aug. 31, 2020.
The case for Innovative Industrial Properties
Innovative Industrial Properties stands as the leading cannabis-focused real estate investment trust (REIT). The company buys and leases out properties to cannabis operators, usually in sale-leaseback deals where the customer sells its property to raise capital.
This business model has worked incredibly well for IIP. The company's rental revenue more than tripled year over year in the third quarter of 2019. Its Q3 adjusted funds from operations (AFFO) more than quadrupled. The company is also consistently profitable, with year-over-year earnings growth of 314% in the third quarter.
IIP currently owns 49 properties in 15 states. Its customers include some of the biggest cannabis operators in the U.S., including Cresco Labs, Green Thumb Industries, and Trulieve Cannabis. These properties generate an average yield on invested capital of around 13.2%.
Achieving even more growth shouldn't be a problem for IIP. Sale-leaseback transactions are a great way for cannabis operators to raise cash. IIP's reputation makes it an ideal candidate for these cannabis operators to turn to. In addition, the cannabis markets in many of the states where IIP owns properties are only in their early stages. Of course, the company has even more states where medical and/or recreational cannabis is legal to which it could expand in the future.
On top of its strong growth prospects, IIP offers a juicy dividend. Its dividend currently yields nearly 4.5%. The company has more than doubled its dividend payout in just the last 12 months.
There are negatives for any stock. Perhaps the biggest drawback for IIP is that its business model requires constant addition of capital. That means the company could conduct more stock offerings as it did recently, resulting in the dilution in the value of existing shares.
Better marijuana stock
My view is that both of these marijuana stocks have a lot of room to run over the long term as the U.S. cannabis market expands. However, if I could only pick one of them, it would definitely be Innovative Industrial Properties.
It's hard to beat IIP's track record of revenue growth, its profitability, and its fantastic dividend. I think that the stock is a great choice for investors seeking to profit from the marijuana boom.
