Last year was a watershed for cannabis stocks, with several states legalizing marijuana sales in some form, but 2021 has even more potential.
New Jersey will soon roll out adult sales, and there's a good possibility that New York, facing a $4 billion budget shortfall, will legalize adult-use sales, making it the second-largest cannabis market behind California. New York Gov. Andrew Cuomo has said that adult-use sales would produce more than $300 million per year in taxes. Pennsylvania and Connecticut could follow New York's lead, with the governors of both states already pushing legislation that would clear the way for adult-use sales.
Innovative Industrial Properties (IIPR -0.92%) and Columbia Care (CCHWF 10.53%) are different types of cannabis stocks that share one thing: expectations for explosive revenue growth this year, based on record numbers last year and the companies' own forecasts. The two stocks have done well, but are off their 12-month highs, providing an opportunity for investors to make a lot of money by buying now and holding on for the ride.
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Innovative Industrial Properties offers growth and a dividend
Analysts weren't thrilled with Innovative Industrial Properties' fourth-quarter report because it came in below expectations, even though the company nearly doubled every positive metric over the prior year.
So much is expected of IIP that it is finding itself a hard act to follow. That's a good thing, because it gives investors a chance to buy in on a booming company at a reasonable price. The stock is up 123% over the past 12 months, but it's down more than 18% over the past month.
IIP is a Real Estate Investment Trust (REIT) that specializes in leasing space to cannabis companies. The company generally buys a medical marijuana company's property and then leases it back, giving the tenant much-needed capital that is hard to come by because of federal laws that complicate banking operations regarding cannabis companies.
IIP's leases are long-term (10 or 20 years) absolute-net agreements, meaning the tenant bears all the costs for the facilities' maintenance. In the fourth quarter the company said it collected 100% of its contracted rent, and it has not had to offer rent deferrals since this past July.
In 2020 the company reported $116.9 million in revenue, net income of $64.4 million, and adjusted funds from operations (AFFO) of $97.8 million, year-over-year improvements of 162%, 191% and 180%, respectively.
On top of that, IIP has a great dividend growth record. It raised its quarterly dividend 6% in December to $1.24 a share, giving it a yield of 2.8% at its current price. The company has raised its dividend nine times since its IPO in 2016.
Columbia Care is poised for a breakout
New York City-based Columbia Care seems to be in the right place at the right time. The company expects to close on its $240 million deal to purchase Green Leaf Medical in the third quarter of 2021, giving it an even bigger presence in the mid-Atlantic states. Those are the same states that are just now beginning to come online for adult-use sales.
New Jersey just approved adult-use sales, and its legislature is still ironing out the regulations, setting off what is likely to be a row of dominoes as nearby states scurry for the tax dollars these sales will generate.
New York, Pennsylvania, and Maryland already all have bills before their legislatures to approve adult-use sales. Virginia passed its adult-use sales law in February, though it won't take effect until 2024. All of those states already allow medical marijuana sales, as do Delaware and the District of Columbia.
The company is already in a solid position. Columbia Care's shares are up more than 121% over the past 12 months, but down more than 20% over the past month, closing at $6.13 a share on Wednesday. Pot stocks tend to be volatile, and Columbia is no exception. Nearly a year ago it was trading at $0.78 a share, and it climbed to as high as $7.89 last month before sliding back a bit to where it is now.
There's plenty of risk with Columbia, but it's hard to argue with its growth. The company, which has 76 dispensaries and 24 cultivation and manufacturing facilities, just issued preliminary fourth-quarter and year-end numbers, saying it expected to make $76 million in revenue in the quarter, an increase of 56% over the third quarter and a boost of 228% year-over-year. Columbia also said it should show revenue of $198 million in 2020, an increase of 151% year-over-year, and that full-year revenue for 2021 should be between $500 million and $530 million, not counting what revenue might come from adult-use sales in New Jersey.
Weigh the risk vs. the reward
It's easy to be bullish on the future of cannabis, particularly with companies that already are showing strong revenue growth like these two.
I think Innovative Industrial Properties is probably a safer bet because it is already turning a profit and has a decent dividend that rewards investors for their patience. Columbia is a little riskier than IIP, but at its current price it may have more upside. If the company's 2021 estimates are correct, it makes sense to buy in on the stock now before the first-quarter revenue numbers come in and goose the stock price.
