Believe it or not, we're nearly halfway through 2020. It's been a rough year so far for many marijuana stocks, although a few have fared much better than others.
I expect that the overall cannabis industry will gain some momentum over the next six months. If I'm right, that should be good news for the stocks of leading cannabis companies. But what's the top marijuana stock to buy for the second half of 2020? My view is that there's a really strong argument for Innovative Industrial Properties (IIPR -5.46%).
Potential for unlocking value
Innovative Industrial Properties is running neck-and-neck with Scotts Miracle-Gro as the best-performing cannabis stock in the first half of the year. But while Scotts has benefited from its consumer lawn and garden business as well as its cannabis-focused Hawthorne subsidiary, all of IIP's success has resulted from its focus on the U.S. medical cannabis industry.
It's no secret that U.S. marijuana stocks tend to trade at a discount to their Canadian peers. The reason why that's the case isn't a secret, either: Marijuana remains illegal at the federal level in the United States.
However, I think that the prospects of U.S. marijuana legalization are now better than they've been in a long time -- and perhaps better than they've ever been. The primary obstacle to legalization in the U.S. hasn't been the lack of public support or even congressional support. Instead, it's been Senate Majority Leader Mitch McConnell's opposition.
Polls are now showing, though, that the GOP majority in the Senate could be in jeopardy. If Democrats retake the Senate and hold onto the House as expected, I think that a marijuana legalization bill is likely to be passed by both chambers in 2021. And I predict that it will be signed into law, regardless of who wins the presidency.
If the chances for this scenario unfolding increase in the coming months, it will provide a catalyst to many marijuana stocks. But I think that U.S. marijuana stocks will especially benefit. As one of the strongest companies in the U.S. cannabis industry, Innovative Industrial Properties will see more of its value unlocked as the prospects of federal marijuana legalization grow.
A winner even if legalization isn't on the way
I could be wrong, though. The political winds could shift back into the GOP's favor, with Sen. McConnell retaining his firm grip on which bills can be brought before the Senate for a vote. The good news is that Innovative Industrial Properties is well-positioned to win even if legalization isn't on the way.
IIP specializes in providing real estate capital to U.S. medical cannabis operators. It typically buys properties from these companies then leases the properties back to them. The medical cannabis operators receive cash to fund their business and expansion plans. IIP receives a steady, long-term revenue stream.
The growth strategy for IIP is simple. First, the company needs its tenants to keep paying their rent. Second, it has to use its cash to fund more sale-leaseback deals. So far, this strategy is working splendidly. IIP's revenue more than tripled year over year in the first quarter of 2020 with its earnings per share jumping 118%.
Sure, the COVID-19 pandemic caused a handful of tenants to miss rent payments. But the tenants should resume paying rent next month. They also plan to repay the deferred rent in full over an 18-month period. Most important is that the total amount that IIP didn't receive in May and June is only 3% of its total annualized revenue.
I don't think achieving the first part of IIP's growth strategy will be a problem. The second part shouldn't be either. IIP has already closed 11 sale-leaseback deals this year.
That other nice benefit
There's one other nice benefit that Innovative Industrial Properties offers that we can't overlook -- its dividend. IIP's dividend yield currently stands at close to 4.6%. The company doesn't have to generate a whole lot of earnings growth to deliver a market-beating total return as long as the dividend stays at that level.
But IIP's earnings will almost certainly continue to grow, which means the dividend won't stay at the current level. As a real estate investment trust (REIT), IIP must return at least 90% of its taxable income to shareholders as dividends. As its earnings grow, its dividend will grow too.
It's possible that another marijuana stock will outperform IIP in the second half of 2020. However, my view is that you won't find a pot stock that's more of a sure thing than this cannabis-focused REIT.