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2 Cannabis Stocks to Buy in the Bear Market

By Prosper Junior Bakiny - May 22, 2021 at 6:10AM

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Bargain hunting, not panic selling, is the right strategy to adopt in a bear market.

Last year's market crash -- fueled by fears of the pandemic's effects on the economy -- turned out to be a great buying opportunity for investors. Since the market bottomed out in late March 2020, the S&P 500 is up by more than 80%.

No one knows exactly when we will have to face another bear market, which is defined as a drop of 20% or more from recent highs. But it pays to be ready to pick up shares of great companies from the discount bin once it happens. For those looking for exposure to the booming cannabis industry, two excellent pot stocks to consider buying in the next bear market are Innovative Industrial Properties (IIPR 2.15%) and Trulieve Cannabis (TCNNF 1.23%). Let's see why both companies are worth your attention if the market takes a dive.

Cannabis leaves on top of $100 bill.

Image source: Getty Images.

1. Innovative Industrial Properties

Business is booming for Innovative Industrial Properties, a real estate investment trust (REIT) that focuses on the medical cannabis industry. Because pot companies have legally restricted access to banking services (while cannabis remains illegal at the federal level), many of these companies have turned to REITs like Innovative Industrial Properties to raise cash and house their products. 

The business model is simple but effective: Innovative Industrial Properties acquires real estate assets from companies in the medical marijuana industry, then leases back these properties under long-term agreements, allowing pot growers to free up some much-needed cash. 

The results have been impressive, and the company's latest quarterly update -- for its second quarter ending March 31 -- was more proof of concept. The REIT reported total revenue of $42.9 million, which soared by 103% compared to the first quarter of 2020. The company's net income of $25.6 million jumped by 121.9% year over year. Meanwhile, the cannabis industry continues to gain steam in the U.S. 

In the November 2020 election, several states voted to legalize medical or recreational adult-use of the substance. These include Arizona, South Dakota, New Jersey, Mississipi, and Montana. And since then, recreational cannabis has also been made legal for adults in New York, which automatically became the second largest state market (after California). Innovative Industrial Properties does business in 18 states and owns 69 properties with an average lease length of 16.7 years. Medical cannabis is legal in 36 states and the District of Columbia, giving Innovative Industrial Properties plenty of room to expand. 

There is the worry that if a change in legal circumstances in the U.S. allows cannabis companies easier access to capital via banking services, that could severely harm Innovative Industrial Properties' business. While many cannabis companies would turn to banking services if they could, there are good reasons to think Innovative Industrial Properties would remain popular even under these developments.

Just because pot growers can acquire loans from banks, thereby incurring more debt, doesn't mean they will. While the cash that comes with taking out loans can provide a level of financial flexibility for companies, in the long run debt -- and especially a lot of debt -- can have significant downsides, including high interest rates, among others.

For cannabis companies, doing business with Innovative Industrial Properties allows them to have access to cash while avoiding many of the downsides of debt. The growth of the cannabis industry will continue to benefit the REIT, and in the long run, the company's shareholders should be handsomely rewarded, just as they have been in the past few years. 

2. Trulieve Cannabis 

Thanks to a commanding presence in Florida, Trulieve Cannabis has recorded regularly strong financial performance. The company more or less delivered during the first quarter. Trulieve Cannabis reported revenue of $193.8 million, 102% higher than the first quarter of 2020. The pot grower's net income of $30.1 million was 27% higher than the year-ago period.

Unlike most other pot growers, Trulieve Cannabis is used to seeing green on the bottom line, and investors shouldn't worry that it was short of analyst expectations on that front this time around. Instead, let's focus on the company's prospects. Perhaps the biggest recent news for Trulieve Cannabis is its planned acquisition of Arizona-based Harvest Health & Recreation in a transaction valued at $2.1 billion.

Cannabis plants grow tall under bright blue skies.

Image source: Getty Images

The deal will help Trulieve Cannabis gain a stronger presence outside the Sunshine State (and especially in Arizona), which should help bolster revenue and profits. The acquisition, according to Trulieve, will create "the most profitable multi-state operator in the world's largest cannabis market." The combined entity will have a presence in 11 states and operate 126 dispensaries.

It will be one of the market leaders in at least two states -- Florida and Arizona -- and as the cannabis industry continues to grow, the new Trulieve will undoubtedly be one of the biggest beneficiaries, thanks to its already strong roots throughout the U.S. Personally, I was a fan of Trulieve Cannabis even before this planned acquisition. This deal makes the marijuana company even more attractive, especially if its shares happen to drop in a bear market. 

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Innovative Industrial Properties and Trulieve Cannabis Corp. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Innovative Industrial Properties Stock Quote
Innovative Industrial Properties
IIPR
$98.44 (2.15%) $2.07
Trulieve Cannabis Stock Quote
Trulieve Cannabis
TCNNF
$13.15 (1.23%) $0.16
Harvest Health & Recreation Inc. Stock Quote
Harvest Health & Recreation Inc.
HRVSF

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