The cannabis market has been a volatile space in recent years. A wave in legalization, particularly in Canada but also through parts of the United States, led to significant growth and speculation in the industry.
More recently, though, the space has been hit by an oversupply of product. The end result has been a lot of blood in the streets but, as the saying goes, that’s the best time to buy, even if that blood is yours.
Here are three ways that investors can play a cannabis industry rebound.
Cannabis pure play
One pure-play way to tackle the cannabis industry is through Canopy Growth Corp. (CGC). Though Canopy is headquartered in Canada it truly is a global company with operations in several nations. The company sells recreational cannabis products like ointments and edibles. It sells medical cannabis as well. It owns retail stores Tweed and Tokyo Smoke, as well as hemp operations throughout the United States.
At its core, Canopy represents a compelling prospect because of the liquidity it offers investors. As of the end of its first quarter of its 2021 fiscal year, the company held cash and short-term investments worth $2.05 billion.
It needs the cash because, despite significant cost-cutting, the company lost $108.5 million in the first quarter this year. This is an improvement over the $185.9 million loss seen a year earlier, and it came as the company’s revenue grew 22% year-over-year.
Due to industry oversupply, management shut down two greenhouses and ceased farming at its New York hemp facility. Ultimately, the company needs to become cash flow positive, but its cash hoard gives Canopy a nice runway.
‘Pot adjacent’ stock play
For investors worried about buying into a cannabis firm directly, an alternative is to invest in cannabis farm property. This leads us to Innovative Industrial Properties (IIPR).
Founded as a REIT, IIPR buys up real estate from cannabis firms looking for cash for growth. It leases these assets back to the seller, often under long-term contracts. Many REITs (real estate investment trusts) can only grow so fast, but IIPR has defied expectations.
Whenever the firm buys a cultivation facility or a similar asset, it does so using cash from a share issuance. Though investors are hit with dilution when this happens, they have come to love the issuance strategy. Shares in IIPR often soar in response because of the perceived value of the assets it buys using its stock. Between May and June of this year, the company raised $373.7 million through these stock offerings.
Between April and mid-July of this year management used this strategy to acquire more than 775,000 square feet of property. Total expected investments for these assets should add up to $226.9 million. So far, the results have proved encouraging. In the latest quarter this year, IIPR generated revenue of $24.3 million.
This is nearly triple the $8.6 million seen the same quarter last year. Adjusted Funds From Operations (AFFO) in the latest quarter totaled $21 million, up from only $5.8 million seen in the first quarter last year. As long as tenants continue to pay the company’s expansion should continue.
A cannabis side play
A third way to play the cannabis market is through Scotts Miracle-Gro (SMG). Most investors will view Scotts as a garden supply business. That is where most of its $3.2 billion in sales came from last year.
What many investors don’t know is that the firm invests in the cannabis and hemp markets too. Its Hawthorne segment focuses on helping consumers grow plants indoor or in urban environments with little or no soil present. This includes flowers and vegetables, but another big application in recent years has been cannabis. It has a wide variety of offerings available for this market, including hydroponic growing systems.
In 2018, Scotts partnered with The Flowr Group to build a 50,000 square foot facility dedicated to cannabis R&D. Their work involves developing growing systems, testing plant genetics, and more.
The firm also has a hemp research facility located in Oregon. Earlier this year the company set up a $50 million venture capital fund, called 1868 Ventures, to invest in all-things cannabis and other company-related projects.
