This has not been the year of marijuana stocks. Although that's not too surprising, as equity markets have been southbound, the industry has substantially lagged the broader market. Thankfully, there is hope for cannabis investors. While estimates vary, analysts have predicted that the pot industry will grow like a weed in the coming decade.
According to market research company Grand View Research, it will register a compound annual growth rate of 25.3% through 2030. Let's consider two stocks that could help investors profit from this opportunity: Jazz Pharmaceuticals (JAZZ 0.55%) and Innovative Industrial Properties (IIPR 0.14%).
Data by YCharts.
1. Jazz Pharmaceuticals
Jazz Pharmaceuticals is a biotech that develops medicines that primarily target cancer and neurological disorders. The company's lineup features Epidiolex, a cannabidiol (CBD)-based therapy that treats seizures associated with a pair of severe forms of epilepsy: Lennox-Gastaut syndrome and Dravet syndrome. Epidiolex became the first CBD-based drug to be approved in the U.S. in 2018.
Jazz Pharmaceuticals' portfolio also includes Xyrem and Xywav -- two medicines used to treat daytime sleepiness in narcolepsy patients -- and cancer drugs Zepzelca and Rylaze. Jazz Pharmaceuticals' revenue increased by 12% year over year in the third quarter to $940.7 million. The company's adjusted earnings per share (EPS) jumped to $5.17, up from $4.20.
NASDAQ: JAZZ
Key Data Points
The good thing about Jazz Pharmaceuticals' lineup is that some of its key products are relatively new approvals. Xywav first earned the nod in 2020. It is on the verge of becoming Jazz's top-selling product, knocking the company's longtime leading therapy, Xyrem, off its pedestal. Many of Xyrem's narcolepsy patients are switching to Xywav since the latter contains a lot less sodium.
Xywav allows narcolepsy patients to stay well within the recommended amount of sodium per day while still being effective at treating daytime sleepiness associated with the condition. Zepzelca also made its debut in 2020 and Rylaze got the nod in 2021. Patent cliffs won't disrupt these therapies' growth anytime soon.
Expect new approvals and label expansions for the company, too. Jazz Pharmaceuticals' programs include a phase 3 clinical trial for Epidiolex in treating epilepsy with myoclonic-atonic seizures. The biotech's pipeline includes well over a dozen other CBD and non-CBD programs. Jazz Pharmaceuticals has outperformed the market this year, likely thanks to solid results and exciting prospects.
The company is well-positioned for market-beating returns over the long run.
2. Innovative Industrial Properties
Innovative Industrial Properties has encountered a series of headwinds this year. The cannabis-focused real estate investment trust (REIT) had to deal with a short-seller report alleging, among other things, that the company was a "marijuana bank masquerading as a REIT" and that many of its largest tenants were under severe financial pressure.
It did not help that the company reported in July (after this short-seller report came out) that one of its tenants had failed to pay rent that month. These issues partly explain the stock's poor performance this year.
NYSE: IIPR
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That said, it's worth it to stick with the company. Short-seller reports often make explosive claims with little (if any) direct evidence. As one would expect, IIPR was quick to strike back, accusing the author of the report, an activist investment firm called Blue Orca Capital, of making false and misleading claims.
With hardly any independent corroboration for these claims, it is hard to side with Blue Orca Capital. Meanwhile, Innovative Industrial Properties continues to record decent financial results. In the third quarter, the company's revenue increased nearly 32% year over year to $70.9 million. EPS increased to $1.32, 10% higher than the year-ago period.
Here is why this company is a good long-term pick. First, its business model allows cannabis companies to free up some capital. By purchasing real estate properties from its clients and leasing them back to them, the company affords them more financial flexibility. This business model is currently popular in the U.S. partly because of federal laws that make it challenging for pot growers to access banking services.
Even in a more relaxed regulatory environment, cannabis companies looking to avoid high-interest banking loans and other pitfalls of traditional financial services would do business with Innovative Industrial Properties. Moreover, the company has a presence in 19 states, whereas medical cannabis is legal in 39 states, giving the company plenty of room to grow even beyond the general expansion of the marijuana sector.
Finally, as a REIT, Innovative Industrial Properties is required to distribute at least 90% of its taxable income as dividends. It currently offers a monster yield of 6.97%, which is well above average. IIPR is a great target for income seekers and those with the patience to see the growth of the cannabis market through.
