For years, marijuana stocks were the hottest thing since sliced bread on Wall Street. All it took was the promise of capacity expansion and eventually international aspirations to send cannabis stocks soaring to the heavens.
But that all changed in April 2019. Over the trailing 15 months, the vast majority of pot stocks have lost at least 50% of their value, if not considerably more. Following the legalization of adult-use weed in Canada, and with two-thirds of U.S. states having given the green light to weed in some capacity, the time for promises is over. Real results are being demanded by investors, and early stage growth hiccups for the marijuana industry have not allowed this to happen.
However, a small number of cannabis stocks are in position to be successful far earlier than many of their peers. While all "next big thing" industries need time to mature (and cannabis is no different), the following three marijuana stocks are the names you'll want to own for the second half of 2020.
Green Thumb Industries
Easily one of the most exciting pot stocks for the second-half of this year (and beyond) is U.S. multistate operator (MSO) Green Thumb Industries (GTBIF 11.69%). Though the U.S. cannabis industry hasn't been without obstacles, Green Thumb has the tools to thrive, even during a recession.
Currently, Green Thumb has 46 operational dispensaries in select legal states, with licenses to open as many as 96 retail locations in 12 states. Green Thumb has been especially aggressive with its expansion efforts in Illinois and Nevada. Illinois opened its doors to recreational marijuana sales on Jan. 1, 2020, and looks to be on track to generate $1 billion in annual weed sales by 2024. Meanwhile, tourist-dependent Nevada has a chance to become the state with the highest cannabis spending per-capita in the country by mid-decade.
The secret sauce to Green Thumb's early stage intrigue is the company's product portfolio. Even though dried cannabis flower is the most widely used weed product in the United States, Green Thumb has been generating around two-thirds of its sales from derivatives. Derivatives are non-flower products, such as vapes, edibles, and topicals. Derivatives not only feature a higher price point per gram than dried flower, but they offer premier margins, too. This is a big reason Green Thumb appears to be on the verge of recurring profitability.
As one last note, Green Thumb doesn't have the same funding concerns as many of its peers. It was able to access to traditional forms of financing, and has turned to sale-leaseback agreements to raise additional capital.
Innovative Industrial Properties
Perhaps the most logical name you'll find on this list is cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR -1.01%). I say logical because IIP, as the company is known, is the most profitable pure-play pot stock on a per-share basis.
As of June 27, Innovative Industrial Properties owned 57 cultivation and processing assets across 15 U.S. states. For context, the company opened 2019 with a mere 11 assets on its books, so it's been a busy bee over the past 18 months. The beauty of this portfolio is that IIP's weighted-average lease length on these assets is a whopping 16.1 years, meaning there's plenty of highly predictable cash flow headed its way. And since REITs are a low-cost business model, save for the large upfront costs associated with acquiring a property, much of this rental income will flow straight to its bottom line.
IIP has also been a prime beneficiary of sale-leaseback agreements. Keep in mind that it is possible we could see a shakeup in the White House and Congress come November that could lead to cannabis banking reform legislation becoming possible in 2021. But until cannabis banking reform becomes a reality, the fact remains that IIP has benefited big-time from providing upfront cash to MSOs in exchange for acquiring and immediately leasing assets back to the seller.
And have I mentioned that IIP recently increased its quarterly payout by 6% to $1.06? That's right – you're netting 4.8% annually right now by simply owning a stake in Innovative Industrial Properties.
Finally, but continuing to stick with the more fundamentally sound U.S. cannabis market, consider buying Scotts Miracle-Gro (SMG -1.25%) for the second half of 2020.
Scotts is what we refer to as an ancillary player. Like IIP above, it's not directly involved in growing, processing, distributing, or selling marijuana. Instead, it plays an integral role in the supply chain that allows the direct players to grow, produce, distribute, and sell cannabis to the public.
What you probably know Scotts best for is the company's lawn and garden care segment. To this day, consumer, farm, and enterprise products comprises the lion's share of the company's sales. With the coronavirus disease 2019 (COVID-19) forcing consumers to stay home for their own good, we've witnessed an uptick in home remodels and other at-home projects. This has included an added focus on lawn and garden care. Scotts Miracle-Gro recently announced that its U.S. consumer segment is expected to grow by 9% to 11% in fiscal 2020, which is up from its previous forecast, issued less than two months prior, of only 1% to 3% sales growth.
But the most exciting growth aspect is subsidiary Hawthorne Gardening. Hawthorne primarily provides indoor growing solutions for the cannabis industry, including hydroponics, lighting equipment, soil, and nutrients. In June 2018, Scotts acquired Ohio's Sunlight Supply, which further added to Hawthorne's product diversity and gave Scott's an opportunity to secure even more small and medium-sized clients. The result has been exceptionally fast growth from Hawthorne. Sales in fiscal 2020 are expected to be up 45% to 50%, with Hawthorne now accounting for almost 17% of Scotts Miracle-Gro's total sales.
At this point, it's not out of the question that Hawthorne is responsible for pulling Scotts Miracle-Gro to consistent high single-digit growth.