Spring has arrived in the Northern Hemisphere – and that means planting is on the minds of many gardeners and farmers. For investors looking to join in the fun and invest cash in stocks, two stocks in the cannabis sector are worth considering. Innovative industrial properties and International Village Farms.
Overall, cannabis stocks are volatile and higher risk, so they are not suitable for all investors.
Top Cannabis Stocks: Overview
Price/earnings ratio (P/E) TTM
1 year return
3 year return
|Innovative industrial properties (NYSE: IIPR)||$4.2 billion||54||124%||615%|
|Village farms (NASDAQ: VFF)||$1.0 billion||64||267%||189%|
Innovative industrial properties: the least risky cannabis pure play
When Innovative Industrial Properties (often referred to as “IIP”) went public in December 2016, it became the first publicly traded company to provide real estate capital for medical use. cannabis industry. It is organized as a Real Estate Investment Trust (REIT).
IIP, which is based in San Diego, buys properties in U.S. states where medical marijuana is legal and leases them to state-licensed operators using long-term triple leases. (Triple net means tenants are responsible for paying property taxes, insurance, and maintenance.) He specializes in sale-leaseback transactions, focusing primarily on facilities used for the cultivation and processing of cannabis , although it also buys dispensaries. As of this writing, the company has 68 fully leased properties in 18 states.
IIP has a long growth track. Currently, medical cannabis is legal in 36 states plus Washington, DC, so the company has the potential to enter new states in addition to expanding into its current states. Additionally, some of the states in which he already owns properties – such as New Jersey – have recently legalized recreational marijuana, which is expected to significantly increase the size of the overall legal marijuana market in those states.
In 2020, IIP’s revenue soared 162% year-over-year to $116.9 million, largely driven by the acquisition of 20 new properties. Earnings per share and adjusted operating funds (FFO) per share jumped 61% and 53%, respectively. (FFO is a key profitability measure for REITs and drives changes in dividends.)
The main reason why IIP is the least risky pure play (which does not equal “safe”) on cannabis, in my opinion, is that it is profitable, while almost all other cannabis companies lose money. In addition, it pays a dividend. Indeed, REITs are required to pay out at least 90% of their taxable income each year as dividends to shareholders in exchange for their special tax treatment. In 2020, the company increased its dividend by 58%. Currently, the title yields approximately 3%.
The main risk for IPD? Once traditional sources of capital provision (such as banks) open up to cannabis companies, IPI will face increased competition. These sources generally cannot deal with companies that directly handle marijuana, as the substance is not federally legal.
Village Farms: A small player with big potential
Village Farms operates from its headquarters in British Columbia, Canada, and Texas. Although it only entered the cannabis business in 2017, it has 30 years of experience as one of the largest producers of greenhouse products in North America. She used that experience to become the lowest-cost greenhouse marijuana grower in Canada, according to the company.
Village Farms entered the marijuana growing business through its Canadian joint venture Pure Sunfarms (JV) with Therapeutic Health Emerald. In November 2020, Pure Sunfarms became wholly owned by Village Farms, after Village Farms acquired its former partner.
In 2020, Pure Sunfarms was the top selling brand of dried flower products at the Ontario Cannabis Store. The OCS holds a legal monopoly on the legal sale of recreational cannabis products in Ontario, Canada’s largest province by population. And Pure Sunfarms continues to roll out its branded Cannabis 2.0 products. In February, it launched its first cannabis-infused edibles, gummies, which helped boost the stock to an all-time high. 34% gain that month.
Village Farms also aims to become a major player in the US hemp-derived cannabidiol (CBD) market. This market opened on January 1, 2019, following the passage of the US Farm Bill, although the regulatory framework is still not entirely clear. (CBD is a non-psychoactive chemical found in both marijuana and hemp that has been linked to certain wellness benefits.) The company’s moves into this space include the formation in 2019 of two joint ventures. for outdoor hemp cultivation and CBD extraction. He is also converting part of his massive Texas greenhouse into a hemp cultivation and CBD extraction facility.
The main risk for Village Farms? That it competes with bigger companies with deeper pockets. But his experience advantage gives him a good chance of being a winner in a competition against the goliaths. Indeed, insiders seem to think so too, as they own about 13% of the company, a relatively high percentage for a company with a market capitalization of $1 billion.
In the fourth quarter of 2020, Village Farms revenue jumped 43% year-over-year to $47.4 million. (Only approximately two months of Pure Sunfarms sales are included in Village Farms’ consolidated results, as Village Farms did not own 100% of the cannabis subsidiary until November 2. Pure Sunfarms’ October results, calculated in proportion to the share held by Village Farms on that date, are recognized in an item entitled “Result of equity of non-consolidated entities”.)
In Q4, Village Farms’ net income landed at $7 million, or $0.12 per share, from a net loss of $7.2 million, or $0.15 per share, a year ago.
Pure Sunfarms powers overall Village Farms results. In the fourth quarter, its net sales jumped 86% to $17.3 million and it recorded its eighth consecutive quarter of positive net profit (excluding a $3.3 million non-cash charge related to the buyout of its former joint venture partner). This helped Village Farms post its ninth straight quarter of positive net profit.
Village Farms has a lot of potential, but its risk level is higher than that of IIP, so invest accordingly.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging 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 wealthier.