There's no question that investors are counting on cloud computing, cybersecurity, the Internet of Things, and telemedicine to be among the fastest-growing trends in North America this decade. But don't count out cannabis.
Although the North American pot industry has been knocked around over the past 18 months as it navigates its way through a number of supply and regulated-based issues, it hasn't dampened projections that call for U.S. legal channels sales to potentially triple between 2019 and 2024. Clearly, not every pot stock can be a winner. However, we're beginning to see some clear separation between the haves and the have nots.
As we barrel headlong into earnings season, investors should keep their eyes on the following trio of marijuana stocks, as they look to have the best chance of absolutely crushing Wall Street's earnings per share (EPS) expectations for the recently completed quarter.
There isn't a more nominally profitable marijuana stock in North America than vertically integrated multistate operator (MSO) Trulieve Cannabis (OTC:TCNNF), which makes it perhaps the most logical choice to trounce Wall Street's quarterly profit expectations.
What's interesting about Trulieve Cannabis is that it's not like other MSOs. It does have a presence in five total states, but has pretty much devoted all of its attention to its home market of Florida. Last week, the company opened its 64th dispensary nationwide, which trails only Curaleaf among publicly traded U.S. MSOs. Of these 64 retail locations, 62 of them are located in the Sunshine State.
By saturating medical marijuana-legal Florida, Trulieve has done a remarkable job of building up its brand without breaking the bank on marketing. As a result, it's gobbled up about half the state's medical cannabis market share. Considering how many locations the company has open, its selling, general, and administrative expenses are quite low relative to its peers.
The only profitability wild card for Trulieve Cannabis is going to be International Financial Reporting Standards (IFRS). Following IFRS accounting means Trulieve accounts for fair-value adjustments (i.e., the estimated value of its crop minus the expected cost to sell its cannabis) prior to calculating its gross profit. The door on these adjustments can swing both ways, providing an arbitrary lift or reduction to net income. My strong suggestion would be to focus on Trulieve's operating income sans fair-value adjustments when it reports in mid-November.
GrowGen is an ancillary player that operates 28 retail locations in 10 states, and is responsible for providing hydroponic equipment, as well as soil, lighting, and nutrient solutions for cannabis cultivators. It should have been a logical winner in the recently ended quarter for two key reasons.
First off, cannabis sales in the U.S. have been red-hot during the pandemic. Marijuana behaved like a consumer-packaged good throughout initial coronavirus disease 2019 (COVID-19) pandemic lockdowns, which is to say that sales didn't fall off as economic activity slowed. As such, we would expect demand from cultivators to have increased throughout the year.
GrowGen has also been stepping up its acquisition activity in recent years. The company has made more than a dozen acquisitions since 2014, each of which is designed to expand the company's product portfolio, geographic reach, or improve its business focus. These buyouts are quickly becoming accretive to GrowGeneration's bottom-line results.
The only way I can see GrowGen not completely blowing past Wall Street's EPS expectations when it reports its Q3 results is if the company really stepped up marketing and new store opening expenditures. Even then, the company's triple-digit sales growth will likely prove more than enough to surpass profit projections.
Innovative Industrial Properties
A third pot stock that can leap over Wall Street's quarterly EPS expectations is Innovative Industrial Properties (NYSE:IIPR). IIP, as the company is known, happens to be the most profitable cannabis stock on a per-share basis.
IIP is a real estate investment trust (REIT) with a specific focus on medical cannabis. The company buys marijuana cultivation and processing sites in the U.S. and leases these properties out for extended periods of time (10 to 20 years). This allows IIP to reap the predictable benefits of rental income, while also passing along annual rental hikes to outpace inflation. When coupled with property management fees (which are based on an annually increased rental rate), IIP generates organic growth of between 3% and 4%.
As of Oct. 1, 2020, Innovative Industrial Properties owned 63 assets in 16 states. Most importantly, 99.3% of its square footage is currently leased, with a weighted-average lease length on its assets of 16.2 years. This is highly transparent and predictable cash flow that's liable to remain robust for a long time to come.
Even more so than GrowGen, IIP is reliant on acquisitions to fuel growth. A majority of IIP's top and bottom-line growth derives from buying new assets, with the company's dividend acting as a hat tip to bottom-line performance. Last month, the company announced a third-quarter dividend hike of approximately 10% to $1.17 a share. This pretty clearly suggests that newly owned assets are driving funds from operation and net income higher.
Look for Innovative Industrial Properties to join GrowGeneration and Trulieve Cannabis in crushing Wall Street's earnings expectations for the third quarter.