Please ensure Javascript is enabled for purposes of website accessibility

Is Innovative Industrial Properties the Best Pot Stock to Buy Right Now?

By Beth McKenna - May 3, 2020 at 12:50PM

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

Cannabis stocks are largely having a terrible 2020 -- but IIPR stock is holding its own.

Cannabis stocks have largely been getting clobbered in 2020, because of both the coronavirus-driven market sell-off and growing pains within the young industry. However, there's still reason to believe there will be at least a couple of big longer term winners among the group.

The legalization movement seems poised to continue to make steady progress. The number of U.S. states giving the green light to marijuana for medical and recreational purposes should continue to increase. In fact, the COVID-19 pandemic could accelerate this process. The crisis is going to leave many states hurting financially, and the tax revenue they could generate from legalizing marijuana is going to be looking mighty attractive. 

Eventually, it seems probable that the substance will be legalized on a federal level in the United States and in other countries, too.

Cannabis stocks aren't for all investors as the group is volatile and risky. But for those who want exposure to the space, the best stock to consider buying now is Innovative Industrial Properties (IIPR -1.68%), a cannabis-focused real estate investment trust (REIT). 

A small cannabis plant with a blue sky and clouds in background.

Image source: Getty Images.

Major cannabis stocks: Key stats

Context is important. So before we dive into Innovative Industrial Properties, or IIP, here's how its stock stacks up on some key metrics to the stocks of the largest three cannabis growers by market cap. All three are based in Canada, while IIP is a U.S. company. 

Company

Market Cap

Profitable on a TTM Operating Basis?

YTD 2020 Return (Loss)

3-Year Return (Loss)

Innovative Industrial Properties  $1.3 billion

Yes

4.7% 383%
Canopy Growth $5.6 billion No (24.1%) 140%
Cronos Group

$2.1 billion 

No

(22.6%) 201%
Aurora Cannabis $972 million No (65.7%) (61%)

S&P 500

-- -- (9.3%) 29.7%

Data sources: Yahoo! Finance and YCharts. Data as of April 30, 2020. TTM = trailing 12 months. YTD = year to date. 

Innovative Industrial Properties' business

IIP buys properties in U.S. states where medical marijuana is legal and leases them to state-licensed operators using long-term, triple-net leases. It owned 51 properties located in 15 states, which were 98.9% leased (based on square footage), as of the release of its fourth-quarter 2019 results on Feb. 26. Most of these properties are industrial and used for growing and processing cannabis, though there are several retail properties in its portfolio.

Why Innovative Industrial Properties is the best cannabis stock

There are two key reasons why IIP stands out from others in the cannabis group: It's profitable, a rarity in the space, and it pays a dividend. It's the only cannabis stock, at least the only pure play, that pays a dividend, I believe. These two factors make the stock less risky than most other marijuana stocks.

In 2019, IIP's revenue rocketed 202% year over year to $44.7 million, driven primarily by acquisitions, though rental increases contributed. Net income soared 293% to $22.1 million, which translated to earnings per share (EPS) increasing 171% to $2.03. Adjusted funds from operations (AFFO) surged 259% to $34.9 million, which translated to AFFO per share rising 144% to $3.27. (FFO is a key watched metric for REITs, as it's the driver of dividend changes.) 

IIP's dividend is yielding approximately 5%. As long as the company remains profitable, investors can count on it paying a dividend. REITs are required to pay out at least 90% of their taxable income each year as dividends to shareholders in return for their special tax treatment.

IIP has a unique tailwind: U.S. companies directly involved with marijuana have a difficult time obtaining financing from traditional sources, such as banks, because the substance isn't legal on the federal level. IIP's lease-buyback transactions provide cannabis operators with cash that they can use to grow their business.

Marijuana's legalization on a federal level has the potential to put a dent in the company's profitability because that event will increase funding options for cannabis operators. That said, there are many successful REITs in other industries, so there's no reason to believe IIP won't still have the potential to be quite successful over the long haul. 

Wall Street expects IIP to grow earnings nearly 88% this year and more than 44% next year. Shares are trading at 20 times forward earnings, an attractive price assuming the company can continue to post solid profitable growth. 

IIP should continue to be less volatile and risky than others in the cannabis group. But the space in general is volatile and risky, so keep this in mind when making investing decisions.

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
IIPR
$117.32 (-1.68%) $-2.01
Canopy Growth Stock Quote
Canopy Growth
CGC
$3.79 (0.53%) $0.02
Cronos Group Stock Quote
Cronos Group
CRON
$3.09 (-0.64%) $0.02
Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$1.55 (1.31%) $0.02

*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
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

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.