- Not all cannabis companies sell marijuana.
- Addressing an industrys pain points can be a lucrative business model.
- Real estate is something that every business needs.
It can pay to be different. In my view, the smartest investments are often companies that have something special -- for example, a clever business model, or a history of rebutting assumptions about players in their industry.
When it comes to the cannabis space, there are actually quite a few stocks that fit the bill, but Im going to focus on three that are worth considering for your portfolio. If you tend to be a relatively conservative investor, have no fear. One of the upsides of investing in unusual companies is that the risks they face tend to be different from those of their more mainstream peers.
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1. AFC Gamma
AFC Gamma (NASDAQ:AFCG), which went public in March, offers a solution to one of the cannabis industrys chief problems: poor access to capital.
Because marijuana isnt legal federally in the U.S., financial institutions are loath to lend money to growers or sellers. That remains true even for businesses in states that have legalized it. So, cannabis businesses that want to expand rapidly tend to have a hard time doing so, especially if they cant issue new shares to raise cash.
To bridge the funding gap, AFC issues collateralized loans to cannabis companies. When its debtors start to repay those loans, AFC makes money. If they default, the company seizes the collateral -- typically, real estate. So, as long as there isnt a cascade of defaults, its business model should prove quite durable.
As a real estate investment trust (REIT), this company pays a healthy dividend that at current share prices yields 7.57%, sharply higher than the S&P 500s current average of about 1.3%. Given the robust expected growth in the market for marijuana and AFCs steadily growing portfolio of loans, the company offers a lot for shareholders to be excited about.
Management has signaled that its likely to increase the dividend payment over time, which makes it an attractive stock to buy now. And the stock will likely gain in value as the REIT issues more loans and increases its quarterly inflows.
2. Innovative Industrial Properties
Much like AFC Gamma, Innovative Industrial Properties (NYSE:IIPR) is a cannabis REIT that helps medicinal marijuana businesses raise capital. But instead of issuing loans and accepting real estate as collateral, IIP simply buys cultivation facilities from cash-strapped companies, then immediately leases the sites back to the sellers.
Its new tenants pay the rent, IIP pockets the cash flow, and then each quarter the company pays out a juicy dividend to shareholders that currently yields about 2.39%. And because the rent payments are locked in for years per the leasing terms, theyre highly reliable, which gives the company the opportunity to raise its dividend frequently.
Its this dividend growth that makes Innovative Industrial Properties a stock worth buying sooner rather than later. In Q2 2018, the payout was only $0.25 per share. Now, its $1.40 per share. More increases will likely be forthcoming as its portfolio of rental properties grows.
Even if marijuana is legalized federally and the cannabis industry gets easier access to traditional financing, Innovative Industrial Properties shareholder returns will be safe. The weighted average lease length of the properties in its portfolio is 16.7 years, so revenue will keep rolling in even if new purchases become harder to find.
3. Cresco Labs
Cresco Labs (OTC:CRLBF) sells cannabis products to consumers, and its business is positively booming. Its revenue popped by 17.7% quarter over quarter in Q2, and expanded by more than 122% year over year. With wholesale operations and retail footprints in major cannabis markets like California, New York, and Massachusetts, Cresco is equally at home in the medicinal-use and the recreational-use segments.
This year, the company has executed a few bolt-on acquisitions, buying regional cannabis operators including Bluma Wellness in Florida and Cultivate in Massachusetts, thereby increasing its market share and revenue base. Another acquisition, Blair Wellness Center in Maryland, is scheduled to close in the fourth quarter. These additions will power Crescos continued strong performance throughout the rest of the year and well into 2022.
Importantly, there isnt necessarily a trade-off between rapid expansion and turning a profit for this company.
While it has more than doubled its revenue over the past year, Cresco increased its total operating expenses by about 39%, from $52.7 million to $86.1 million. And while it isnt profitable yet, its making rapid progress toward that goal and could report non-adjusted profits as soon as next quarter if things continue at their current pace. That means investors looking at buying a marijuana pure-play stock might want to open a position in Cresco Labs before its next earnings report in November.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning 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 richer.Alex Carchidi owns shares of Innovative Industrial Properties. The Motley Fool owns shares of and recommends Cresco Labs Inc. and Innovative Industrial Properties. The Motley Fool has a disclosure policy.>
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