Please ensure Javascript is enabled for purposes of website accessibility

The Top Marijuana Stock to Buy for the Second Half of 2020

By Keith Speights – Jun 28, 2020 at 7:08AM

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

Hint: It's one of the biggest cannabis winners of the first half of the year.

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%).

Cannabis growing in a greenhouse

Image source: Getty Images.

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.

Keith Speights owns shares of Innovative Industrial Properties. The Motley Fool owns shares of and recommends Innovative Industrial Properties and Scotts Miracle-Gro. The Motley Fool has a disclosure policy.

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
$92.15 (-5.46%) $-5.32
Scotts Miracle-Gro Stock Quote
Scotts Miracle-Gro
SMG
$43.62 (-5.01%) $-2.30

*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
342%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

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.