You don't have to buy shares of a marijuana grower to profit from growth in the cannabis sector. Actually, some of the biggest winners in 2020 belong to companies that aren't pure-play pot stocks. These top stocks include GW Pharmaceuticals (GWPH +0.00%) and Innovative Industrial Properties (IIPR +0.77%).
GW Pharmaceuticals ranks as the largest cannabinoid-focused biotech. Innovative Industrial Properties is the leading real estate investment trust (REIT) specializing in the medical cannabis market. Both stocks have jumped more than 20% year to date. But which is the better cannabis play now?
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The case for GW Pharmaceuticals
Many people have viewed cannabadiol (CBD) as an effective treatment for epilepsy for years. But GW Pharmaceuticals became the first to win FDA approval for a CBD drug in treating two rare forms of epilepsy in 2018. That drug, branded as Epidiolex, emerged as a tremendous success story.
GW reported revenue of $120.6 million in the first quarter of 2020, more than tripling the amount from the prior-year period. Epidiolex generated $116.1 million of the total. Nearly all of those sales ($106.1 million) were made in the U.S. However, GW expects its CBD drug will gain momentum in Europe with its recent product launches in the U.K. and Germany.
Epidiolex could soon become an even bigger winner. GW anticipates FDA approval of the drug later this month in treating tuberous sclerosis complex, a rare genetic disease that causes benign tumors. It's also evaluating Epidiolex in a late-stage clinical study as a potential treatment for Rett syndrome, a rare genetic neurological disorder.
But GW's pipeline also includes other promising candidates, notably including nabiximols. The drug is already marketed outside of the U.S. under the brand name Sativex as a treatment for multiple sclerosis spasticity. GW is conducting a late-stage study of the drug in hopes to pick up U.S. approval in the indication. It's also evaluating nabiximols in other clinical trials targeting spinal cord injury spasticity, post-traumatic stress disorder, and other neurological conditions.
The case for Innovative Industrial Properties
Innovative Industrial Properties is a company in the right place at the right time. Medical cannabis operators in the U.S. often face challenges raising capital because of federal regulations about cannabis. IIP provides this much-needed capital by purchasing properties then leasing them back to the medical cannabis operators.
This business model has enabled IIP to deliver phenomenal growth. In its latest quarter, the company's revenue more than tripled year over year and its net income soared 249%.
IIP should have no big problems keeping its momentum going. It now owns 58 medical cannabis properties in 15 states, up from 46 properties at the end of 2019. Nearly all of the square footage in these properties (99.2%) is leased. And those are long-term leases, with a weighted-average remaining lease term of more than 16 years. That should give IIP a steady revenue stream well into the next decade.
More states are legalizing marijuana as well, presenting new opportunities for IIP. There's even an outside chance that federal marijuana laws will be changed in the near future.
As a REIT, IIP must return at least 90% of its taxable income to shareholders as dividends. The company's earnings have grown tremendously, causing its dividend to soar more than 600% over the last three years. IIP's dividend currently yields 4.7%.
Better cannabis play
I'm cautiously optimistic about GW Pharmaceuticals' prospects of gaining FDA approval for Epidiolex in treating TSC. A win should be a major catalyst for the stock. However, my view is that Innovative Industrial Properties is a better cannabis play.
IIP is already profitable, while GW isn't generating a profit yet. The cannabis-focused REIT's market cap is also a lot lower than GW's market cap. Both companies face risks, but IIP's risks appear to be less significant than GW's are.
I think that there's a possibility that GW Pharmaceuticals stock will double within the next few years. But I think there's a probability that Innovative Industrial Properties shares will at least double by 2025. All the company has to do is keep doing what it's been doing.
