As we get ready to close the book on 2020, allow me to call out two sectors that will create enormous wealth for investors over the next decade.
The first is virtual currencies and digital wallets. Fintech is changing banking and payments forever and Square (SQ 5.97%) is at the center of this revolution. It could eventually become the most valuable financial stock in the world.
Another trend creating a lot of wealth is the (state by state) legalization of marijuana. Billions and billions of dollars will be made in this sector. We can already spot one winner -- the highly profitable (and fast-growing) REIT stock Innovative Industrial Properties (IIPR 0.20%).
Both of these stocks have creamed the FAANG stocks over the last few years and will continue to outperform over the next decade. Here's why you should forget about FAANG and buy these two cash machines instead.
Image source: Getty Images.
Why Square is more valuable than any bank
The banking system is highly commoditized. If you blindfolded me and set me down in the lobby of an unknown bank, I couldn't tell you if I was in a Bank of America, a JPMorgan Chase, or a Wells Fargo. They're identical. They all have ATM services, online banking, and safety deposit boxes, and all these banks rely on the same credit check reports.
Square is a different breed. It's a fintech specialist that makes financial services cheaper and faster. Right now, the company provides technology for people performing financial tasks. Square customers use its Cash app to transfer money and make payments. When Square jumped into the brokerage business and offered free trades and fractional shares, Schwab followed, and a race to zero-commission trades began.
Last year Square introduced Square Card, a debit card that allowed businesses in the seller network to start making payments from existing revenue streams without the need to set up a bank account. In the third quarter, sellers spent more than $250 million on their Square cards.
Square's technology allows people to transfer money, use debit cards, and buy stocks and trade currencies. It's already providing a lot of traditional banking services. And now Square has been cleared to do the most important banking function -- provide loans. Square's new virtual bank, Square Financial Services, will be headquartered in Salt Lake City, as its charter was approved by the Federal Deposit Insurance Corporation (FDIC) and Utah regulators.
Square is already a huge business, with over $7 billion in annual revenues. And it's still growing incredibly fast; revenues are up 139% in the most recent quarter. While fintech has been very profitable, it's actually just getting started.
What will be amazing is when Square starts loaning money to all the businesses in its network. At first, banking will be a very small part of Square's business. But as the loan division ramps up, Square will start taking market share from the banks. And the company has serious advantages in that regard. Consider all the data Square has about the companies in its network. If you're a restaurant using Square's point-of-sale technology, Square knows all about your revenues and your ability to make payments. Square doesn't need to run credit checks or ask anybody else about your ability to repay debt. The company has a huge advantage over the banks in financial information about its customers. This knowledge is power and will be immensely profitable to Square (and its investors) in the future.
Why Innovative is the winner in marijuana
It's odd to suggest that people might want to sell shares of Amazon (AMZN 1.20%) or Netflix (NFLX 0.17%) to buy shares of a real estate investment trust (REIT). Why would anybody give up a stake of an internet titan to squat on some land? That's like saying a brick-and-mortar retailer is in a stronger position than an e-commerce leader. Isn't land irrelevant, even a risk, to the future of commerce?
Not if the land is a marijuana farm. Marijuana is already a $10 billion market worldwide, and it's estimated to reach $97 billion in sales in six years. The company that owns the marijuana farms is primed to make a lot of money.
Innovative Industrial Properties (IIP) is the owner of 5.2 million rentable square feet of marijuana farms in the U.S. Like Square, IIP is taking business from the banks. While marijuana is a cash cow, banks avoid providing financial services to marijuana farmers because marijuana is illegal at the federal level. So IIP has stepped in and is offering innovative financing to pot entrepreneurs: sell us your land for cash, and we'll rent it back to you. And its dividend proposition for investors, which yields 3% right now, is the cherry on top of a growing stock price.
As it acquires more and more acreage through its fantastic business model, this company is more and more valuable. And the numbers don't lie.
| Stock | Most Recent Quarterly Sales Growth (YoY) | Profit Margin | Forward P/E Ratio |
|---|---|---|---|
| Amazon | 37% | 5% | 60 |
| Netflix | 23% | 12% | 57 |
| Alphabet | 14% | 21% | 32 |
| IIP | 197% | 56% | 25 |
Data source: Yahoo Finance. YoY = year-over-year. P/E = price-to-earnings. Table by author.
Innovative Industrial Properties is growing way faster and is more profitable than FAANG stocks. This rapid growth won't last forever. During this decade, the federal government will decriminalize marijuana. It's bound to happen and when it does, the demand for IIP's financing will decrease. Revenue growth will slow dramatically. And that's when IIP will shift into a "boring" REIT stock with a hugely profitable portfolio of marijuana farms.
Forget about FAANG and buy Square and IIP
While the FAANG stocks are amazing companies that have had an incredible run, as they all start to pass the $1 trillion mark, finding massive growth opportunities will be harder and harder in the future. And the federal government is going to regulate these mega-caps more and more, and maybe break up a monopoly or two.
Square and Innovative are both in the high-growth stage right now, and both stocks have demolished FAANG stocks over the last few years. As more and more investors wake up to what is happening, these two fast-growers will continue to outperform FAANG stocks over the next decade as well.
