Since Canada enacted nation-wide legalization of marijuana in October 2018, cannabis companies have been the hot new thing in stock investing. But sometimes, that hot new thing isn’t always hot. The cannabis sector has seen a sharp decline in recent months. Major players, like Canopy Growth (CGC) and Aurora Cannabis (ACB), are down by a third or more since the spring. The reasons are varied – licensing bottlenecks in Health Canada, supply and distribution difficulties in a new market, management turnover at Canopy – but the result is clear: the big cannabis companies are not delivering results so far.
But there is still money to be made in the cannabis industry. The product is in demand; the problems the big suppliers face are more in the nature of growing pains. So, to profit, investors will benefit by thinking outside of the grow house. We’ve dipped into TipRanks’ stock database and found three companies that are thriving as service providers for the cannabis industry.
Innovative Industrial Properties (IIPR)
This company is a Real Estate Investment Trust (REIT), focused on the cannabis industry. Innovative buys and manages industrial properties which it then leases to cannabis growers. It’s a profitable model, and the company’s Q2 earnings result bear that out. IIRP reported gains of 155% in both revenues and net income, with the former coming in at $8.28 million and the latter at $3.07 million. EPS, at 30 cents, was up 76%.
According to Exec. Chairman Alan Gold, IIPR has operations in 26 states, with over 2 million square feet leased long-term to cannabis growers. The average remaining lease term is over 15 years, and the properties have a current blended yield of 14.6%. CEO Paul Smithers noted that industry analysts see plenty of momentum in cannabis. In his comments on the earnings, he quoted sources projecting “a 35% increase in US regulated cannabis sales from 2018 to 2019, and reaching nearly $30 billion by 2023.” The current operations, and the prospects for near-term growth, provide IIPR with both a solid foundation and an upbeat outlook.
In an added boon for investors, IIPR has been paying out a quarterly dividend over the past two years, with regular increases in the disbursement. The current yield is 2.16%, and the payment is $1.80 annualized. The July quarterly payment of 60 cents per share marked a 140% increase year-over-year.
Right now, IIPR has one analyst rating, from James Sullivan of BTIG. Sullivan, a 4-star analyst, leads the REIT research team at BTIG. He gives IIPR a $151 price target, suggesting an impressive 81% upside. It’s a clear sign of confidence in the real estate aspect of the cannabis industry.
Scotts Miracle-Gro Company (SMG)
Land is important, but cannabis industry relies on increasing production and multiple harvests per year to maximize revenue. This requires greenhouses and other controlled growing facilities – letting the plants grow wild outdoors simply won’t cut it. And greenhouses are where Scotts Miracle-Gro comes in.
The company may be best known for its Miracle-Gro weed killer and other home gardening products, but its Hawthorne subsidiary is deeply involved in the cannabis industry. Where IIPR provides the real estate needed by the growers, Scotts provides the hydroponic and lighting systems necessary for large-scale indoor cultivation of cannabis. In fact, the company’s annual sales growth of hydroponic systems has outpaced that of traditional lawn and garden gear for the last three years. In a 2016 interview, CEO Jim Hagedorn laid out a vision of marijuana ancillary products as the future of his company: “We’re doing it. It’s beyond stopping. And we’re not getting into pot growing. We’re talking dirt, fertilizer, pesticides, growing systems, lights. You know it’s a multibillion-dollar business...”
Hagedorn’s bullish stand on cannabis has borne fruit. SMG’s fiscal Q3 earnings, reported at the end of July, showed a 14% positive surprise – EPS came in at $3.11 against a forecast of $2.71. The Q3 earnings were up 16% from the year-ago quarter. Shares in SMG are up 76% year-to-date.
Despite the strong earnings and the increasing sales in grow supplies, the most recent analyst takes on SMG are exact opposites. Merrill Lynch’s Christopher Carey gives the stock a Sell rating, and a low price target of $96. He bases his stance on the declining outlook in cannabis stocks over the last two quarters.
5-star analyst William Chappell, of SunTrust Robinson, sees a better future for SMG. He gives the stock a Buy rating, raised his price target by 20%, to $120. He writes, “The continued profitability progression in the Hawthorne segment is an important factor for the stock in quarters to come.” Chappell’s price target suggests a 10% upside to SMG stock.
Shares in SMG are selling for $108.50, just above the $108 average target. SMG is up 5.6% since its July 31 Q3 earnings report.
KushCo Holdings, Inc. (KSHB)
Land and growing facilities aren’t the only support services that the cannabis industry needs. Containers, packaging, and vaporizer products are essential for the medical cannabis segment, for shipping the product and for customer use. KushCo fills this need for the industry.
Supporting the cannabis industry has been lucrative. KushCo reported record earnings in its fiscal Q3, of $41.5 million. On the down side, the company is operating at a loss, and reported a net loss per share of 12 cents. This was an improvement of 2 cents per share from the year-ago quarter. As a mitigating factor to the earnings loss, KushCo reported $21.2 million in available cash in May, a gain of $7.7 million since the start of the company’s fiscal year.
Wall Street’s analysts were generally pleased by KSHB’s quarterly performance. Benchmark analyst Mike Hickey saw fit to initiate coverage of the stock with a Buy rating and a $7 price target, suggesting an upside of 83%.
Writing from Northland Securities, analyst Greg Gibas gave a clear reason for optimism in KSHB: “We believe KSHB will continue to benefit from growing & deepening its customer relationships while also cross-selling throughout its customer base as the company continues to power the global cannabis ecosystem.” His $8 target implies a high upside of 109%. Scott Fortune, of Ross Capital, also gave the stock an $8 target, and added, “The company reaffirmed its $150M FY19 annual revenue target with an emphasis on doubling revenues next quarter and new states being added to its list. Canada's cannabis 2.0 is also expected to come online in 4Q19 and contribute meaningfully to its top line.”
These three reviews give KSHB its consensus rating of Strong Buy. The average price target, $7.67, suggests an upside potential of 100% from the current share price of $3.82.
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