The stock market may be the greatest long-term wealth creator, but it's not without its fair share of corrections and bear markets. The current bear market we're in just happens to be the steepest in recorded history, with the benchmark S&P 500 losing 34% of its value in a span of less than five weeks.
For the cause of this record-breaking move, look no further than the spread of coronavirus disease 2019 (COVID-19). Following what looks to be successful mitigation efforts in China, this lung-focused illness is spreading like wildfire in other countries throughout the world, including the United States, which the World Health Organization warned could become the epicenter of the outbreak. Mitigation measures currently in place in the U.S. and various other countries are designed to slow the spread of the coronavirus and save lives. Unfortunately, it'll come at a steep cost to workers and businesses.
For any normal industry, a near halt to economic activity would be challenging. But for the still-nascent and relatively underfunded cannabis industry, it could be a death sentence for a number of floundering companies.
The coronavirus bear market couldn't have come at a worse time for pot stocks
As I previously discussed, there are a number of ways COVID-19 could adversely impact the pot industry. In no particular order, it could:
- Slow or halt supply chains for everything from vape pens to HVAC equipment and lighting.
- Bring tourism to a crawl, hurting cannabis retailers in tourist-heavy locations.
- Stop trade-shows from happening, crushing any chance of partnerships and dealmaking.
These constraints come atop the many struggles the pot industry has already been dealing with. Canada, for instance, has seen supply shortages in some provinces and bottlenecks in others, with the black market still thriving throughout our northerly neighbor.
Meanwhile, in the U.S., high tax rates have made it virtually impossible for legal-channel retailers to compete with illicit producers.
Additionally, cannabis stocks throughout North America have struggled to gain access to traditional (i.e. nondilutive) forms of funding. In the U.S., marijuana remains entirely illegal at the federal level, with banks and credit union still worried about federal repercussions if they offer basic financial services to the industry. Comparatively, pot is legal in Canada, but banks have taken a considerably harsher stance on lending given the industry's deteriorating balance sheets.
Look for these marijuana stocks to survive and thrive amid the coronavirus pandemic
Yet, despite all of this negativity, five pot stocks look as if they'll have little to no trouble surviving this coronavirus crash. As the marijuana industry washes out, look for these pot stocks to step forward as leaders.
Among Canadian growers, none is in better shape to weather this storm than OrganiGram Holdings (OGI 5.08%). Even though a number of its peers have more in cash on hand, OrganiGram is the one that has the operational and competitive advantages.
For instance, it's one of a handful of growers to have wholesale agreements in every province, and it just so happens to be the only major grower (i.e., capable of 100,000 kilos or more of peak annual output) located in an eastern Atlantic province. These eastern Atlantic provinces tend to have higher cannabis-use rates than the national average.
Perhaps most importantly, OrganiGram's efficiency is unsurpassed in Canada. The company's three-tiered cultivation system should produce a yield per square foot that doubles or triples its peers. Also, having just one cultivation facility will allow OrganiGram to more effectively adjust its output and expenses, at least compared to other major Canadian growers.
Innovative Industrial Properties
U.S.-based cannabis real estate investment trust (REIT) Innovative Industrial Properties (IIPR 4.44%) should have no issue thriving during the coronavirus bear market. That's because it's a low-cost REIT that acquires marijuana cultivation and processing sites, which are then leased out for long periods of time (10 to 20 years). This creates a situation where IIP is generating highly predictable cash flow with minimal ongoing expenses to owned properties.
In terms of profitability, no pot stock is making more money on a per-share basis. Further, the company's 53 properties spread across 15 states are earning an average of 13.2% on its roughly $780 million in invested capital (this figure includes money set aside for asset improvements). At this rate, Innovative Industrial Properties will net a complete payback on its investments in 5.5 years.
In fact, IIP is so financially sound it's the only pure-play pot stock that's currently paying a dividend -- $4 per year, which works out to a yield of 6%!
Among U.S. multistate operators (MSO), Trulieve Cannabis (TCNNF -0.53%) should have little trouble pushing through this harsh COVID-19 downturn. That's because Trulieve didn't try to make one acquisition after another, nor did it attempt to lay claim in as many markets as possible. Instead, Trulieve has focused almost all of its effort on Florida.
Trulieve Cannabis currently has 47 open dispensaries in the U.S., 45 of which are located in the Sunshine State. By keeping its costs close to the vest and focusing on brand-building within medical marijuana-legal Florida, the company has been able to keep its expenses way down. Not surprisingly, it holds the bulk of Florida's medical marijuana market share.
While IIP leads all pure-play pot stocks in terms of per-share profitability, no marijuana stock has generated a larger operating profit to date than Trulieve. This should make it a winner once the COVID-19 panic has passed.
Green Thumb Industries
Another MSO that should be in really good shape is Green Thumb Industries (GTBIF -0.36%). Green Thumb has been actively moving into new states via organic expansion and acquisitions. However, it hasn't overextended itself with debt, nor have operating expenses soared. In fact, there's a pretty decent chance that Green Thumb pushes into recurring profitability this year as sales more than double.
Leading the charge on the growth front is the legalization of recreational weed in Illinois, as well as the acquisition of Integral Associates in Nevada. Even though a lack of tourism will undoubtedly hurt sales in Nevada, at least temporarily, the Silver State is still expected to lead the nation in cannabis spending per capita by 2024.
Green Thumb has also taken advantage of sale-leaseback agreements with Innovative Industrial Properties to raise cash. This will ensure that Green Thumb won't face the same cash crunch that has plagued other MSOs.
Fifth and finally, look for Canadian extraction-service provider MediPharm Labs (MEDIF -13.30%) to not just survive but outperform.
MediPharm's job is pretty simple. It takes cannabis and hemp biomass and processes it for the distillates, resins, concentrates, and targeted cannabinoids that are used in the production of derivatives. Derivatives being alternative consumption options, such as edibles, topicals, and infused beverages. Since derivatives hit Canadian dispensary shelves three months ago -- and they're a much higher-margin item than traditional dried cannabis -- this puts MediPharm Labs at the epicenter of a high-demand movement within the cannabis space.
Additionally, MediPharm's clients are typically on fee-based volume contracts that can last beyond 18 months. This creates a semblance of revenue predictability that few pot stocks can boast of. Given that MediPharm Labs is already profitable, it looks like a good bet to push through the coronavirus crash.