After the March 2020 market crash, billionaire investor and Berkshire Hathaway executive Charlie Munger might have summed up investor sentiment best. He said that everyone was "frozen" and unsure of what was going to happen next. Without a doubt, last year's dive caught many investors flat-footed, without a clue what to do with existing stakes and watchlist buys. Having a strategy in place and knowing which stocks you'll want to target if they go on sale is a good approach and can prevent a good opportunity from passing you by.
If you're a cannabis investor, however, you'll want to exercise even more caution given how risky and volatile the industry is. But two stocks that are solid investments and generating profits in the sector are Innovative Industrial Properties (IIPR -2.25%) and Trulieve Cannabis (TCNNF -5.83%). Here's a closer look at why you shouldn't hesitate to buy either of these stocks if the markets crash this year.
1. Innovative Industrial
If you're looking for stability in the cannabis industry, you'll be hard-pressed to find a safer pot stock than Innovative Industrial. The company is not only growing, but it's stable, generating profits and accumulating cash along the way. With a positive net income in each of the past four quarters and positive free cash flow, this isn't a stock cannabis investors will need to worry about. And in its most recent earnings report, released on Nov. 4, 2020, its sales of $34.3 million were up a staggering 197% year over year, which the company credited mainly to new acquisitions.
Innovative Industrial is a real estate investment trust (REIT), which is growing swiftly along with the cannabis industry. The company acquires properties and leases them back to licensed cannabis producers. So, as the number of producers increases, so too does the demand for spaces to produce marijuana products. It's one of the safer ways to invest, because Innovative Industrial is simply collecting rent payments -- it isn't growing anything itself. And by accumulating cash, it's in a great position to continue adding to its portfolio, which as of Sept. 30, 2020, totaled 63 properties. Among its tenants are some of the biggest names in the industry, including Curaleaf, Green Thumb Industries, and Cresco Labs.
But one of the reasons the stock may not be a great buy right now is that it's not cheap, trading at close to 70 times its earnings. By comparison, the average holding in the SPDR S&P 500 ETF Trust trades at a price-to-earnings (P/E) multiple of just 28.
Over the past 12 months, Innovative Industrial's stock has climbed more than 130%, while the S&P 500 rose by just 17%. During a crash or market correction, the stock could become a hot buy, giving investors the opportunity to grab it at a reduced price.
Another solid cannabis investment out there is Trulieve Cannabis. Although it is a licensed producer, this isn't as dangerous of an investment as many of its peers, which are burning through cash and expanding too quickly. Trulieve is technically a multistate operator, and it received three dispensary permits for West Virginia earlier this month -- which will be the sixth state where it has operations (others include California, Massachusetts, Connecticut, Pennsylvania, and Florida).
But despite the growing national presence, the company is only expanding at a rapid pace in Florida. In its home state, the company regularly opens new locations every month. On Jan. 27, it launched a dispensary in Sebastian, Florida -- its 73rd in the state and 78th nationwide.
By not expanding too aggressively in too many places, Trulieve can help keep its costs and operations under control. And while fast-growing companies like Curaleaf may boast about achieving positive adjusted EBITDA numbers, Trulieve is profitable without any sort of adjustments at all. It has recorded a profit in each of the past four quarters, and over the nine-month period ending Sept. 30, 2020, its net income totaled $25.3 million while also posting net sales of $353.1 million -- double what it generated in the previous year.
Trulieve, however, is another stock that has gotten too hot right now. Up around 350% in just the past 12 months, its P/E ratio has shot up to over 85. Like Innovative Industrial, Trulieve is a great investment -- just not at its current price. There's a lot to like about its business and the Florida-centric strategy, which has been very successful for the company thus far. But with Cresco Labs entering the Sunshine State and Curaleaf continuing to grow its presence there, it may be more difficult to justify paying such a high premium for Trulieve as competition could intensify and chip away at its sales growth. It's still an appealing pot stock to own, but investors may want to stick to putting Trulieve on their watchlists for now and simply being ready to pounce if there's another market crash.
This article represents the opinion of the writer(s), who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.