Marijuana Stock Volatility
In a sector already renowned for its volatility, marijuana stocks didn’t get a lot of favors from the COVID-19 pandemic and the ensuing economic collapse.
Quite the opposite: many pot companies saw their share values plummet, followed by a strong rally post-March. But one pot stock saw a lower floor and a faster recovery than almost all the others: Innovative Industrial Properties Inc (NYSE:IIPR). Long one of my favorite pot stocks, IIPR stock is up nearly 20% in 2020 and has a lot more room to grow.
Before I get into why Innovative Industrial Properties stock is so darn special, let’s first take a look at the pot industry overall.
The fact is, the marijuana industry is still very much an emergent industry. I know we’ve been exposed to this market for years now, but in reality, it is still in its infancy, or at best, its adolescent stage.
Like all emergent industries, volatility is the name of the game, which isn’t necessarily a bad thing. After all, volatility means that, while wild swings downward are a possibility, there is also more potential to see massive growth in short periods.
In other words, with volatility and emergent industries, you take the good with the bad, the chance for losses with the outsized chance for gains.
The marijuana market, however, has a whole other layer added on top: the political fight.
Marijuana stocks are highly dependent on political machinations, particularly in the United States. After all, cannabis is a product that has been for the better part of a century considered illegal. It would be unrealistic to expect a massive shift toward legalization all at once, and we’re seeing the process play out in fits and starts around the globe.
That stop-and-start battle over legalization makes things more complicated from an investor’s perspective. That, in turn, leaves pot stock prices more vulnerable to rapid political shifts than those of almost any other type of stock.
And then, on top of all that, we have the COVID-19 economic panic. Whereas before, the most important issue in 2020 for pot stocks was the fight for federal U.S. marijuana legalization (and, more broadly, the fight for legalization around the world), now the sector is dealing with the economic downturn following the first wave of the virus.
Many investors are now wary as to just how fast the economy will be able to recover if another COVID-19 surge sends shares tanking once again. Are investors going to return to the market in force following the next surge, or will they play it more cautiously?
While that question applies to the stock market in general, it is amplified when it comes to the marijuana industry. Considering the industry’s built-in swings, adding a Black Swan event to the mix in the form of COVID-19 naturally exasperates the situation. As a result, we have been seeing many investors fleeing toward more liquid markets and safe-haven investments.
But not all marijuana stocks are created equal. While almost all of them are subject to intense volatility, there is at least one pot stock that is more or less immune to these swings: Innovative Industrial Properties.
IIPR Stock Stability
In direct contrast to the majority of the pot industry, IIPR stands as one of the few pot stocks that has shown itself to be solid and stable over the years.
Which isn’t to say that it hasn’t seen gains. Far from it; Innovative Industrial Properties stock has shown astonishing gains over the past few years.
Chart courtesy of StockCharts.com
At one time rising by as high as 750%, IIPR stock has a growth rate of nearly 500% over the past three years. And, as evidenced by its 2019 price, this stock has a lot of room yet to grow.
As I mentioned at the outset, Innovative Industrial Properties stock remains a stalwart of the marijuana industry, even in these perilous times, seeing 20% growth despite the economic uncertainty of 2020.
So what makes IIPR stock so special? How has it been able to eke out stability in an industry known mainly for having none? The answer is simple: the company deals in marijuana real estate.
Innovative Industrial Properties Inc is not focused on the day-to-day production of pot. Instead, it’s concerned with buying and leasing land to marijuana companies across the U.S.
If this was a mining boom, IIPR would be the company selling picks and shovels. That means huge gains could be in store for the company, especially as we edge toward federal U.S. marijuana legalization.
On top of all that, IIPR is a marijuana real estate investment trust (REIT).
That means, not only is Innovative Industrial Properties stock able to benefit from the massive gains of the pot industry without having the same degree of exposure to the drop-offs as other marijuana stocks, as a REIT, the company is mandated to distribute 90% of its profit back to shareholders by way of dividends.
That healthy dividend, which continues to grow, is another pillar of stability in an already stable and potential-filled company.
Furthermore, Innovative Industrial Properties is continuing to expand its footprint across the U.S.
Its most recent purchase was of a 108,000-square-foot industrial space situated on approximately 7.4 acres in Pennsylvania. The deal is valued at about $8.9 million. (Source: “Innovative Industrial Properties Acquires Pennsylvania Property and Expands Real Estate Partnership With Holistic Industries,” Innovative Industrial Properties Inc, June 10, 2020.)
The company then began a long-term leasing agreement with Holistic Industries, Inc., which intends to continue using the facility as a medical marijuana growing and processing facility.
So what we have here is a marijuana company that not only is stable, not only provides a healthy dividend, not only operates in the strongest marijuana market (the U.S.), but also is able to net massive gains for investors.
In other words, IIPR stock is about as close as you can get to the perfect marijuana stock.
First-Quarter Financial Report
Innovative Industrial Properties’ financials paint a picture of a company that continues to outperform expectations even during the most unforeseen and difficult of circumstances.
In its first quarter of 2020, IIPR saw its revenue hit $21.1 million, a 210% increase from the same quarter a year prior. (Source: “Innovative Industrial Properties Reports First Quarter 2020 Results,” Innovative Industrial Properties Inc, May 6, 2020.)
Net income available to common stockholders hit approximately $11.5 million for the quarter ($0.72 per diluted share) and adjusted funds from operations (AFFO) of approximately $17.8 million ($1.12 per diluted share).
Net income available to common stockholders and AFFO increased by 249% and 236% from the prior year’s first quarter, respectively.
The quarterly dividend—one of the most attractive aspects of this stock—reached $1.00, a 122% increase from the first quarter of 2019. That is set to increase to $1.06 in Q2.
The company also had $108.3 million in cash and cash equivalents at the end of the quarter, meaning it is well financed.
You won’t many people more bullish on the marijuana market than me. While volatility and unpredictability may make the marijuana industry not for everyone’s taste, the outlook of the industry is hard to deny.
We’re talking mass legalization likely within the next decades, starting with the U.S., creating a $100.0-billion industry from scratch.
Now, there’s going to be a lot of bumps and obstacles on the way to that outcome. And, again, the near-term ups and downs may not be to everyone’s liking.
Investors uninterested in a buy-and-hold play or in engaging in more nerve-racking day trading may think that the marijuana market is not for them. And for any who share this opinion, I point them toward Innovative Industrial Properties Inc.
The fact is that Innovative Industrial Properties stock is the best of all worlds among pot stocks. It provides a healthy dividend, shows strong growth, and has proven itself more than equal to the task of weathering even the most extreme and unexpected stock market storms.
In an industry I’m very bullish on, IIPR stock stands in a league of its own.