Last year, cannabis stocks entered the mainstream, thanks to the legalization of recreational marijuana in Canada and the increasing momentum of the legalization movement in the United States.
Investor interest in this space remains in high gear, driven by strong performances among some stocks in the sector and the group’s powerful projected long-term growth dynamics.
While all pure-play cannabis stocks are risky, two of the higher-quality names in this sector, in my view, are Canada-based grower Canopy Growth (NYSE:CGC) and cannabis industry-focused real estate investment trust Innovative Industrial Properties (NYSE:IIPR).
|Company||Country||Market Cap||Profitable (TTM)?||Dividend||YTD 2019 / 2-Year Performance*|
|Canopy Growth||Canada||$14.2 billion||No||N/A||53.3% / 614%|
|Innovative Industrial Properties||U.S.||$1.1 billion||Yes||1.7%||139% / 533%|
|S&P 500||—||—||—||1.9%||16.3% / 23.2%|
For context, so far in 2019, here are the stock performances of the second-through-fifth-largest Canadian cannabis growers by market cap (behind No. 1 Canopy): Aurora Cannabis: 52.4%, Cronos Group: 48.6%, Tilray: (44.7%), and Aphria: 16.1%.
Canopy Growth: Deep pockets and a big-name partner
Canopy Growth’s core operation is growing, processing, and selling medical and recreational cannabis in Canada, though its medical marijuana business is expanding internationally.
Moreover, earlier this year the company became the first of its large Canadian peers to enter the U.S. hemp market, which opened up thanks to enactment of the U.S. Farm Bill on Jan. 1. It’s building a large-scale production facility in New York State, where it’s licensed to produce products derived from hemp, which notably includes cannabidiol (CBD) products. (CBD is a nonpsychoactive chemical that’s been associated with a host of medicinal benefits.)
Two big reasons to favor Canopy are its huge pile of cash — it had over $3 billion of cash and cash equivalents as of the end of its most recent quarter — and its partnership with alcoholic beverage giant Constellation Brands (NYSE:STZ). These two advantages are related, as last fall Canopy received $4 billion from the maker of Corona and Modelo beers when it upped its ownership stake in Canopy to 38%. The two partners are working on developing cannabis-infused beverages, which are expected to get the regulatory green light in Canada later this year.
Another reason to like Canopy, founded in 2013, is that its founder Bruce Linton is a co-CEO. Research has shown that founder-led companies tend to outperform in the stock market over the long term…
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