Please ensure Javascript is enabled for purposes of website accessibility

The Hands-Down Best Marijuana Stock to Buy During This Market Correction

By Keith Speights - Mar 8, 2020 at 11:33AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The choice is easy.

Few stocks have proved to be immune to the coronavirus-fueled market correction that's under way. Marijuana stocks are no exception. Two of the leading cannabis-focused exchange-traded funds (ETFs) have plunged more than 30% from their highs set earlier this year.

While some investors are afraid to dip their toes in the water amid the stock market turmoil, others seek to capitalize on the opportunity to buy solid stocks at bargain prices. If you're looking for a marijuana stock to buy during this market correction, I think that the hands-down best alternative around is Innovative Industrial Properties (IIPR -1.52%).

Marijuana leaf in a shopping cart

Image source: Getty Images.

Swimming against the current

Most stocks have fallen year to date. But not Innovative Industrial Properties. Its shares are up 23% so far in 2020.

Granted, IIP isn't completely bullet-proof. Its shares have declined 12% from its highs set in February. There's no question, though, that the stock is swimming against the current much more effectively than most marijuana stocks.

This isn't anything new for IIP. Most pot stocks delivered disastrous performances last year while the S&P 500 generated an impressive 29% gain. IIP shares skyrocketed 67% in 2019 and were up over 190% year to date at one point. 

There's a similar story if we go back in time one more year. IIP stock soared 40% in 2018 while the two biggest cannabis-focused ETFs fell more than 20% and the S&P 500 slipped 6%.

Simply the best

Any time you see a stock that manages to outperform consistently, the right question to ask is: why? For Innovative Industrial Properties, the answer to that question boils down to the company's business model and its solid execution.

IIP ranks as the leading cannabis-focused real estate investment trust (REIT). Its sweet spot is in buying medical cannabis operators' facilities and leasing the facilities back to them. These sale-leaseback deals are great for the medical cannabis operators because they provide much-needed capital. They're also great for IIP because the deals generate steady and dependable revenue over a long period of time.

As of late February, IIP owned 51 properties in 15 states. Based on square footage, these properties are 98.9% leased. Those leases won't expire soon. The weighted-average remaining lease term is around 15.6 years. And those 51 properties generate an average current yield on invested capital of 13.3%.

Innovative Industrial Properties has a fantastic history of revenue growth. Over the last three years, its trailing-12-month revenue has skyrocketed more than 900% higher. The company's revenue in its latest quarter nearly quadrupled year over year.

The company has also been profitable in every quarter since the second quarter of 2017. Most cannabis companies are still unprofitable. Few if any can boast the track record of profitability that IIP has. 

We can't talk about IIP without mentioning its dividend. As a REIT, IIP must distribute at least 90% of its taxable income to shareholders through dividends. Its dividend yield currently stands above 4%. The company has increased its dividend by nearly 567% over the last three years.

No other cannabis stock claims the combination of stock performance, revenue growth, profitability, and dividend growth that Innovative Industrial Properties has delivered. When it comes to marijuana stocks, IIP is simply the best.

A bright future

All Innovative Industrial Properties has to do to keep growing is to repeat its successful formula of buying and leasing more cannabis properties. There's plenty of room for the company to expand. IIP operates in less than half of the states that have legalized medical cannabis -- and more states could legalize medical cannabis later this year.

Sure, the company faces a few risks. Should interest rates rise, IIP's costs of borrowing to fund expansion would go up. If the U.S. legalizes marijuana at the federal level or changes federal laws to remove restrictions on financial institutions that provide services to cannabis operators, the company's real estate capital alternative might not be quite as attractive. There's also a possibility that tenants could fail to pay their rent.

I'm not really concerned about any of these risks at this point, though. Interest rates are going down, not up. The likelihood of federal legalization of marijuana seems low as long as Sen. Mitch McConnell (R-Ky.) remains the Senate Majority Leader. I think that IIP's real estate capital funding will continue to be appealing to medical cannabis operators even if it becomes easier for the companies to borrow money from banks and other lenders.

Neither am I overly worried about IIP's tenants being unable to hold up their end of the lease agreements. IIP's top 10 tenants include several of the biggest cannabis operators in the U.S. I think these companies' opportunities will increase over time. 

The best stocks to buy in a market correction aren't always the ones that fall the most. Sometimes, the best approach is to invest in stocks that hold up well despite overall market headwinds -- like Innovative Industrial Properties.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Innovative Industrial Properties Stock Quote
Innovative Industrial Properties
$111.64 (-1.52%) $-1.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.