With a bit of luck and some careful due diligence, a strategic investment in the right stock could lead to a pot of gold at the end of your investing rainbow. This is especially true right now, as market volatility puts several high-quality stocks on sale despite their having the potential to be big winners over the long term. Here's a closer look at what I believe are two golden opportunities today.
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Switch
Switch (SWCH) is a real estate stock that invests and operates data-storage facilities, a critical industry in our technologically driven world. The company operates six massive data campuses in five distinct regions of the U.S. In total, its portfolio consists of 16 data facilities totaling just 5 million square feet of space which is leased to 1,350 tenants across the multimedia, digital content, telecom, e-commerce, logistics, IT, cloud, and software industries.
Switch is in the process of converting into a real estate investment trust (REIT), aiming to make the transition by 2023. This move will give the company access to more favorable tax treatment, such as paying zero corporate tax, while opening doors for more favorable capital costs -- which, in turn, will help it expand. But its performance today is already showing promising signs.
Revenues increased 15.7% in 2021. Adjusted funds from operations (AFFO) grew 12%, while adjusted earnings before taxes, income, depreciation, and amortization (EBITDA) rose by 17.4%. Switch has three active developments underway, with its Las Vegas campus being ready for delivery in early 2022. Additionally, it's working with existing customers to expand megawatt capacities, which will increase its contract values and boost revenues.
Over the next several years, I think it's very likely Switch will become a major player in the data-center industry, particularly after the acquisitions of three of the five existing publicly traded data center REITs. Its debt ratio of 4.7 times its EBITDA and $411.4 million in liquidity puts it in a strong position for continued growth and should only improve after the switch to a REIT is complete.
NewLake Capital
NewLake Capital (NLCP 3.68%) is the new kid on the block, having gone public in August 2021. This cannabis REIT is very much in its early stages of growth. The company specializes in using sale-leaseback agreements to acquire properties used for the cultivation or retail cannabis, then leasing them back to existing operators on long-term net leases. It has 29 properties in its portfolio across 11 states.
The cannabis industry is booming, with no signs of slowing. Record sales in 2020 followed by another strong year in 2021 mean cannabis is well on its way to being a $25 billion industry in just a few years' time. Because cannabis isn't legal on a federal level in the U.S., the industry relies on private capital rather than banks to help provide funds for expansion.
A huge plus for the company is its financial position. It has zero debt, $168 million of cash on hand, and $345 million in committed capital, leaving a lot of room for growth without the risk of overleverage. Using its strategic focus of owning and leasing assets in low-license states also improves the environment for the tenant and leaves the company with plenty of room to grow, given that many low-licensing states are the newest to approve cannabis for recreational or medical use.
NewLake doesn't have a huge track record given its youthful age, but if it's anything like its predecessor, Innovative Industrial Properties (IIPR 2.41%), an investment in this small and rapidly expanding company could pay off handsomely down the road.
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Going for gold
With market volatility and turbulence in the global economy, these stocks could fall and even stay down for a while before going back up. Every company and industry, even ones with major growth potential, have their own weak points and risks. Just because they seem well-positioned for turning a small investment into a pot of gold in the long haul doesn't mean it's guaranteed. Taking a long-term approach, and having patience and a bit of grit, will greatly improve your chances of seeing these companies soar.
