Buckle up and hold on, because it's been a wild year for investors. During the first quarter, the benchmark S&P 500 shed more than a third of its value in less than five weeks due to the coronavirus disease 2019 (COVID-19) pandemic. This was followed by a rally during the second quarter that registered as the strongest since 1998.
But it's been an especially crazy time for marijuana stock investors. Despite enticing long-term growth prospects, a much-needed shakeout of the industry has been occurring over the past 15 months. It also hasn't helped that regulatory-based supply issues in Canada and high tax rates in select U.S. states have challenged legal-channel sales. In other words, most pot stocks have been in an extended "crash" of their own for more than a year.
With coronavirus cases once again climbing in the United States, it's not out of the question that the stock market will plunge for a second time in 2020. But should that happen, it doesn't mean investors should avoid the highly volatile cannabis industry. If the stock market crashes again, approach it as an opportunity to buy these four pot stocks.
Green Thumb Industries
One of the most exciting cannabis stocks to consider buying on any significant dip in the stock market is U.S. multistate operator Green Thumb Industries (GTBIF 0.62%). Green Thumb has 48 operational stores at the moment, but has the licenses in its back pocket to open as many as 96 retail locations in 12 states.
Recently, Green Thumb has placed a lot of focus on its expansion into Illinois and Nevada. Illinois became the first state to legalize the consumption and retail sale of adult-use cannabis entirely through the legislative process. Sales commenced on Jan. 1, 2020, with Green Thumb angling to open as many stores as is permissible by state law. Meanwhile, Nevada is a major tourist attraction that should allow the Silver State to lead the country in per-capita cannabis spending by as soon as 2024.
Green Thumb also looks to be on track to become profitable on a recurring basis (perhaps even in 2020). Approximately two-thirds of the company's sales are derived from higher-margin derivative products (e.g., vapes, edibles, and topicals), which plays a critical role in pushing the company toward recurring profitability. In other words, it's starting to look like it has the tools and management team to be a big-time winner in the U.S. pot industry.
Of the dozens of marijuana stocks investors can choose to buy, no pure-play is more profitable on a nominal basis than Trulieve Cannabis. Last year, Trulieve brought in almost $253 million in sales and generated close to $87 million in operating income, before taking into account fair-value adjustments and one-time benefits. No marijuana company even comes close to bringing home this sort of operating income on a no-nonsense basis.
The secret to Trulieve's success continues to be its focus on the Florida market. The company recently opened up its 50th store in the Sunshine State, which is a big reason it holds the lion's share of Florida's medical marijuana revenue. Outside of Florida, Trulieve has just two retail stores open. By focusing on one market, Trulieve has demonstrated an effective blueprint to building up its brand and keeping its marketing costs down. It should have no trouble remaining profitable, even if the stock market crashes.
Innovative Industries Properties
Have I mentioned the importance of profits during periods of panic? While Trulieve is responsible for the highest nominal operating income, real estate investment trust Innovative Industrial Properties (IIPR -1.26%) is the most profitable pure-play pot stock based on earnings per share.
As of July 1, Innovative Industrial Properties owned 58 properties (of which all but one was leased out) in 15 states. These cultivation and processing sites are leased for a weighted-average length of 16.2 years, with the company likely netting a complete payback on its invested assets in roughly six years. Although the cost to acquire new assets can be pricey, the ongoing maintenance of these assets is minimal, leading to a relatively low-cost business model with predictable cash flow.
Innovative Industrial Properties has also taken advantage of lawmakers' inability to pass cannabis banking reform at the federal level. With access to nondilutive forms of capital dicey for U.S. multistate operators, IIP has become a go-to for sale-leaseback agreements. With these deals, IIP acquires a property for cash, then immediately leases it back to the seller. This helps multistate operators gain access to cash, while giving IIP a long-term tenant.
And as the icing on the cake, Innovative Industrial Properties is the only pure-play pot stock that pays a dividend.
An ancillary pot tock is a company that generates a small portion of its revenue from the marijuana industry. In Scotts' case, close to 80% of its fiscal second quarter sales were derived from its well-known lawn and garden products. Though these are somewhat seasonal and weather-dependent items, demand for traditional lawn, garden, and crop-care products has picked up significantly because of people being stuck at home due to the pandemic. No matter what's thrown Scotts' way, this lawn and garden segment tends to deliver fairly consistent annual profits.
Then there's Scotts Miracle-Gro's cannabis-focused subsidiary, Hawthorne Gardening. Hawthorne supplies hydroponic equipment to indoor cultivators, along with an assortment of lighting, nutrient, and soil solutions. While the company is growing organically, acquisitions have played a key role in its success. The purchase of Ohio's Sunlight Supply in 2018 expanded its product portfolio and brought in additional revenue from small and medium-sized businesses. With a focus on the U.S. market, Hawthorne is expected to grow sales by 40% to 50% in fiscal 2020.